eco 3203 exam 1

Example of a ratio scale:

1, 5, 25, 125.... This scale has a constant ratio of 5.

In the last three hundred years the standards of living between richest and poorest countries have converged.

False. The period since 1700 known as the Great Divergence and is characterized by rising inequality across countries.

With an average annual growth rate of 5% per year, per capita income will increase by what factor over a century?

126. The income will double every 14 years (70/5=14) which means in a century it will double about 7 times.

After graduating college, you start a job making $40,000. Your earnings grow at a constant growth rate of 3% per year. When you retire 40 years later, you earn approximately:

130,000

According to the income approach to GDP, the largest percentage of GDP comes from:

compensation to employees

value added

subtracting the value of intermediate products from the revenue generated by each producer.

The short run us concerned with _____, while the long run is concerned with ______.

the causes of economic fluctuations; the determinants of economic growth.

When we look at the long run, we are concerned with...

the causes of economic growth.

A simple economy produces two goods: coffee and TVs. In 2014, the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/lb to $5/lb. Based on this information the percentage change in real GDP in chained prices benchmarked to 2015 is:

-16.5%

A simple economy produces two goods: coffee and TVs. In 2014, the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/lb to $5/lb. Based on this information the inflation rate is approximately:

-6.2%

4 step approach to study macroeconomic questions:

1. document the facts, 2. develop a model, 3. compare the predictions of the model with the original facts, 4. use the model to make other predictions that may eventually be tested.

According to figure 3.7, the fastest growing country during 1960-2014 had a level of per capita GDP approximately equal to _____ of the US level:

Botswana had an annual growth rate above 6%, making its level of per capita GDP around 1/4 of the US.

What counts as an investment?

Buying a new house.

This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP?

Consumption expenditures will increase bu $12,000.

Find the solution to the model: Demand curve is Q = 20 - 10P and supply curve is Q = 5 + 5P.

Q = 10, P = 1

For a model to be successful comparing the income in the United States to Ethiopia, is must predict which country is richer and the magnitude of income differences between the countries.

True

If a model has at least the same number of equations as unknowns, it can be solved.

True

If population and GDP are growing at the same rates, then per capita GDP does not grow.

True

In 1990, a country's per capita income was 1,000. By the year 2005, it was 1650. The average annual growth rate was approximately 0.05.

True

In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function.

True

One reason economic activity fluctuates is that the central bank leads the economy into a recession in order to bring down inflation.

True

Over the long term, economic growth swamps economic fluctuations.

True

You plot the production function for the United States on a graph with output per person on the vertical axis and capital per person on the horizontal. If a shock occurs causing the productivity parameter to increase, the production function would shift upward.

True

In part, macroeconomists study individual behavior and microeconomic theories to create theories of aggregate economic activity.

True, macroeconomists rely on microfoundations to create theories about aggregate economy.

Suppose we compare GDP per person in Uganda and the US in two ways: first using the exchange rate method and second using the relative price-based conversion as well. Then, Uganda appears to be richer under the relative price-based conversion than with the exchange rate conversion.

True.

What is a question that macroeconomist may be interested in?

Why did prices rise in many countries in the 1970s? This question is concerned with aggregate level data, not individual and firm-level decisions.

expenditure approach to GDP formula:

Y = C + I + G + NX

According to Figure 4.5, does the production model accurately predict the level of per capita GDP for Singapore?

Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP.

Output per a person is higher when...

a country is more efficient in adapting a technology, has a higher capital to population ratio, and has stronger property rights and contract enforcement.

The difference between an exogenous and endogenous variable is that...

an exogenous variable is an input to the model, while an endogenous variable is an outcome of the model.

exogenous variable

an input that is allowed to change over time, but is usually determined ahead of time by the model builder. Population is an example.

parameter

an input that is generally fixed over time. Example is level of minimum wage (in a labor market model).

At the height of the 2008 recession, United States employment...

decreased by approximately 0.5% per month.

The marginal product of the labor curve represents the:

demand for labor.

A production function exhibits increasing returns to scale when you:

double each input and you more than double the output.

The rule of 70 states that if yt grows at a rate of g percent per year, then the number of years it takes yt to:

double is approximately equal to 70/g.

One of the key characteristics of the Cobb-Douglas production function is:

constant returns to scale.

Recently, the largest share of GDP is

consumption.

If the productivity parameter is assumed to equal 1, the production model:

correctly identifies that countries are richer if they have more capital, incorrectly predicts that poor countries are substantially richer than they are, and incorrectly predicts that some countries are richer than the United States. This is because the model implies that more capital implies more output per person but incorrectly overestimates the value of per capita output.

Macroeconomics is to microeconomics what...

cosmology is to particle physics.

Potential output is a measure of per capita GDP in the future.

False, potential GDP measures the way per capita GDP would evolve if prices were completely flexible and resources were fully employed.

An economic model is an exact replica of the economy.

False.

In most rich countries, inflation has been relatively high since the 1980s.

False. Inflation rates were high for most rich countries in the 70s, but started declining in the 80s.

Computing the chain-weight index of real GDP:

First compute the Laspeyres and Paasche indexes, then calculate the average of the two growth rates.

When a state builds a new penitentiary, ____ rises, but that does not imply that _____ improves.

GDP; welfare

A US citizen works for a US company in Germany. The income earned by the citizen will increase which countries GDP?

Germany

The solution to the firm's profit maximization is:

MPL = w and MPK = r.

Paasche Index

Method of computing changes in real GDP using final prices.

If MPL < w, the firm:

should fire some labor until MPL = w.

If MPK > r, the firm:

should hire more capital until MPK = r.

When plotted on a ratio scale, constant growth appears as a:

straight line

The marginal product if labor is defined as:

the additional output generated by hiring an additional unit of labor.

A central topic of study in macroeconomics is _____, while a central topic of study in microeconomics is ______.

the overall performance of an economy; an individual market.

Convergence

the process of a nation's economy catching up to another nation's economy.

Another common name for net exports:

trade balance (negative term is trade deficit)

Imagine a two-good economy where the quantity of the goods produced is unchanged over time but where prices have increases. Then, in the most recent year, real GDP will be the largest number when...

using the Paasche index.

If MPK = r, the firm:

has the optimal amount of capital.

A firm should only rent more capital if the MPK....

is greater than the rental rate of the capital (MPK>r).

endogenous variables

outcomes. Models use parameters and exogenous variables to come up with these.

basic formula for nominal GDP:

nominal GDP = price level X real GDP

When comparing shares of consumption in GDP it is best to use ______ variables. When comparing real rates of economic growth it is best to use _____ variables.

nominal; chain-weighted.

In the equation Q = 20 - 10P, P and Q are...

endogenous variables because they are outcomes.

The quality of labor is included in:

TFP

If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2?

$1,050

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is...

$150,000. Value added = Revenue generated by the producer - value of intermediate goods (wood and steel).

If population doubles every 35 years, then the growth rate of population is:

2%

The average annual growth rate of per capita GDP in the United States from 1870 to 2015 is...

2%

If real GDP increases by 2% and nominal GDP increases by 4%, inflation is approximately...

2%.

Assume that both Japan's and the United States' average annual per capita GDP growth rates are 2% per year, and both countries began with an initial per capita GDP of $1,000. However, the United States has been growing since 1915 and Japan only since 1965. In 2015, the United States would have been ________ than Japan.

2.69 times richer

Suppose that in 1965 Japan had an initial per capita GDP of $12,000 per year and China had a per capita GDP of $5,000. China is growing at 5% per year and Japan is growing at 3% per year. ______ would have been richer in 2016 with a per capita GDP of approximately____.

China; $60,204

When price equals marginal cost, economic profits are positive.

False, economic profits are only positive is there is some market power that allows firms to change prices above marginal cost.

The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person.

False since capital per person is subject to diminishing returns to capital.

The fraction of people living in poverty has risen since 1960 as the populations of India and China have grown substantially.

False since the countries are experiencing economic growth.

What is not an example of capital?

Intermediate goods such as screws and bolts since inputs used in the production process are not capital.

A country that since 1980 has shown convergence to the United States is

South Africa

What does not increase the US GDP?

The US government increasing social security payments since it is a transfer payment.

In the production model from the text, what is not an exogenous variable or a parameter?

The amount of capital is since it must be solved for—it is an unknown endogenous variable. The supply of capital, supply of labor, and productivity parameter are parameters.

How much does the capital to population ratio explain in the difference in per capita income between the richest and poorest countries?

The capital to population ratio explains about 1/3 of the difference while TFP explains the rest.

Laspeyres Index

The method of computing changes in real GDP with initial prices.

Wages in ancient Greece and Rome were approximately equal to wages in seventeenth-century France.

True since modern economic growth is a very recent phenomenon.

When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions.

True, comparisons based on exchange rate adjustments alone tend to yield larger differences across countries than those adjusting for prices.

Per capita GDP can grow at a negative rate.

True, examples of countries that have per GDP growing at a negative rate can be found in Africa.

Until 1970, labor's share of GDP has been relatively stable at approximately two-thirds if GDP.

True, from 1950-1979 labor's share of GDP has remained between 65-70%.

What is a question macroeconomics tries to answer?

What are potential causes of financial crises?

The difference between a parameter and an exogenous variable is that...

a parameter is fixed over time, while an exogenous variable is allowed to change over time.

If per capita GDP in 2014 was $900, in 2015 was $1,000 and in 2016 was $1,200, the growth rate of per capita GDP between 2014 and 2016 was:

about 33%

economic profits

above-normal returns associated with prices that exceed those that prevail under perfect competition.

A firm uses capital and labor to produce a good. Which of the measurement ways would be the greatest?

accounting profit

Over the last one hundred years, potential output has...

been relatively equal to actual output except for the Great Depression era.

Output per capita and output per worker are...

equal in the production model but output per capita is smaller in general.

The three main variables we discuss in the short run are:

economic fluctuations, inflation, and unemployment.

The positive budget deficit since the early 2000s in the US implies that...

federal government spending exceeds federal government revenue since budget deficits result when the government borrows money to finance its spending.

During the 1940s, _____ increased sharply as a percentage of US GDP because of ____.

government expenditure; World War II

The unemployment rate in the United States has historically been...

higher than Europe until 1989 and since then, lower.

The trade balance is negative when...

imports exceeds exports.

One reason for a larger trade deficit in the last several decades is:

increased consumption since a increased trade deficit is accompanied by a rise in consumption and a decline in government purchases.

Consider two economies: If each country has the same production function and the same amount of capital and labor, the country that _____ produces more.

is more productive

Costs of economic growth include:

job loss in certain sectors, increased income inequality, and global warming.

Under national income accounting, GDP equals...

the good produced in the economy, the income earned in the economy, and the total purchases in the economy.

How quickly GDP doubles will depend on:

the growth rate of GDP

GDP

the market value of the final goods and services produced in an economy over a certain period.

net exports are also called

the trade balance

In the labor market model, an endogenous variable is...

the wage rate since it is determined by labor supply and labor demand.