ECO2013 Chapter 5
Which statement regarding the recovery phase of the business cycle is TRUE? A) An economy in the recovery phase of the business cycle can have a lower GDP and a higher unemployment rate. B) An economy in the recovery phase of the business cycle can have a higher GDP and a lower unemployment rate. C) The recovery phase of the business cycle is followed by recession. D) The recovery phase of the business cycle is preceded by the peak phase.
A) An economy in the recovery phase of the business cycle can have a lower GDP and a higher unemployment rate. Correct: An economy in a recovery phase is one that has reached its low point (trough) when GDP has decreased and unemployment has increased. Therefore, in the early part of the recovery phase, an economy might not have had enough time to increase its GDP or reduce its unemployment. In this case, GDP and unemployment may appear worse during the recovery than during the recession.
Which statement is CORRECT regarding the calculation of GDP? A) If GDP is calculated using the expenditures method the result will be the same as if it is calculated using the income method.. B) If GDP is calculated using the expenditures method the result will be smaller than if it is calculated using the income method. C) If GDP is calculated using the expenditures method the result will be larger than if it is calculated using the income method. D) If GDP is calculated using the expenditures method the result must be adjusted for taxes for it to be the same as if it is calculated using the income method.
A) If GDP is calculated using the expenditures method the result will be the same as if it is calculated using the income method. Correct: All spending in the economy necessarily equals payments to all of the factors of production. A dollar spent adds up to a dollar in wages, interest, rents, or profits.
(Figure: GDP Estimates)The table lists gross domestic product (GDP), consumption (C), gross private domestic investment (I), government spending (G), and net exports (X - M). Compute each as a percent of GDP for the five years presented. Which component of GDP is the most stable? (HINT: Look for the smallest change from the year with the smallest contribution to GDP to the year with the largest contribution.) A) consumer spending B) net exports C) investment spending D) government spending
A) consumer spending Correct: Consumer spending (70.19 / 61.72 = 1.14).
GDP accounting includes: A) final goods only. B) intermediate goods only. C) final goods and intermediate goods. D) used goods.
A) final goods only.
Assume the federal government runs huge budget deficits today to finance, say, Social Security, Medicare, and other programs for the elderly, and finances these deficits by selling bonds, which raises interest rates. Since business often borrows money to invest, and interest is the cost of borrowing, these higher interest rates will reduce investment. All of these explain why this is bad for the macroeconomy EXCEPT: A) that spending on the elderly is beneficial for the economy. B) a decrease in investment means a decrease in GDP. C) that taxes must be raised sometimes to pay off bonds. D) a decrease in GDP will result in a decrease in employee training and an increase in the cost of producing goods and services.
A) that spending on the elderly is beneficial for the economy. Correct: Spending on the elderly today does little to improve the economy of the future. Reduced investment today means lower GDP in the future because investment in new capital, employee training, and research and development mean higher output, higher salaries, and more new products and services in the future. Further, sometime in the future, taxes must be raised to pay off the bonds or continue paying interest.
Which statement correctly describes the key problem with the way the NBER dates recessions and recoveries? A) Dating of recessions and recoveries is done before the events have started. B) Dating of recessions and recoveries is done after the events have started. C) Dating of recessions and recoveries is done while the event is taking place. D) The NBER always reports accurate information.
B) Dating of recessions and recoveries is done after the events have started. Correct: A key problem is that the dating of recessions and recoveries is done after the events have already started. Therefore, it describes what has already happened and does not help to predict when future recessions will occur or when they will end.
According to the Happy Planet Index, an annual survey conducted by the New Economics Foundation, Costa Rica ranks as the happiest county on Earth ("Take a Trip to the Happiest Country on Earth," Forbes, October 1, 2012). The index takes into account a number of factors including the quality of life and life expectancy, but most important the index values the sustainability of the environment, which it argues "establishes an undeniable link between happiness and the environment or nature." The World Bank estimates that Costa Rica's GDP per capita in 2012 was approximately $8,800, about one-fifth that of the United States. Why doesn't GDP per capita always correlate well with a country's standard of living? A) GDP per capita doesn't consider standard of living at all. B) GDP per capita provides a rough estimate of a country's standard of living. C) There is no accurate data available on a country's standard of living. D) There are no proper tools available to estimate the quantitative value of all factors affecting the standard of living in a country.
B) GDP per capita provides a rough estimate of a country's standard of living. Correct: A country's GDP per capita provides a rough impression of a country's average standard of living. Clearly, a country with a very high GDP per capita (such as Luxembourg) would offer its citizens a better life than a country with a very low GDP per capita (such as Ethiopia). However, GDP per capita does not take into account all factors affecting standard of living. First, it does not account for income equality. Second, it does not consider nonmonetary aspects, such as the climate, the environment, and natural beauty. Third, it does not measure how countries prioritize their spending. For example, Costa Rica chose not to have an army, allowing the government to increase spending on education, health care, and environmental conservation, programs that lead to a better standard of living.
A headline in the January 27, 2012, USA Today read "Economists See Growth Slowing, Recession Risk Falling," highlighting government statistics that showed economic growth slowing to a 2.2% rate for the year, below previous estimates. What does a slowing economic growth suggest? A) If the economy is experiencing a slow growth rate, it will soon approach a recessionary time period. B) If the growth rate is slow and positive; the economy will not necessarily go into a recessionary time period. C) If the growth rate is slow and positive, it indicates that the economy is approaching the peak phase of the business cycle. D) If the economy is experiencing a slow growth rate, it will soon approach the trough phase of the business cycle.
B) If the growth rate is slow and positive; the economy will not necessarily go into a recessionary time period. Correct: Just because economic growth is slowing does not mean that another recession will occur quickly. Although economic growth slowed in 2012, it was still positive and comfortably so. Economists believed that the economy was still on a path of recovery, and any short-term dips were not likely to cause growth to become negative for two quarters, the measurement needed in order for another recession to occur.
Gross domestic product and its related statistics are published quarterly and are often revised in the following quarter. Do you think quarterly publication and revision in the next quarter would present problems for policymakers trying to control the business cycle? A) Yes, too much information makes it hard for the economists to agree. B) No, the information is not enough to help economists predict accurately the state of the economy. C) No, the policymakers should be provided with yearly information on GDP and related statistics, for an accurate prediction of business cycle. D) Yes, the information provided is apt for the policymakers to predict the movement of business cycle well in advance for adequate policy measures.
B) No, the information is not enough to help economists predict accurately the state of the economy. Correct: Only getting GDP and related data quarterly makes policymaking more difficult. We could conceivably be six months into a recession before policymakers are sure of the data. Consequently, they must rely on other economic data to confirm that the economy is turning down, and because of these information lags, whatever action they take may be too late or too little, or actions are taken at the same time the economy is turning in the other direction, causing policies to heighten the business cycle.
Critics of the NIPA argue that they are outdated and fail to account for "intangibles" in our new knowledge economy. For example, many firms create copyrighted materials (movies, books, etc.) that when completed is much more valuable than just the value of the marketplace inputs that went into their production. What might be some of the problems associated with trying to include these intangibles in the NIPA? A) The problem is actually minimal; the NIPA does not take the necessary steps to do the right thing. B) The NIPA finds it difficult to place a value on something that is intangible. C) The NIPA believes it is too easy for thieves to retrieve the information due to hackers. D) The real problem is the timing of when to include such projects in the NIPA.
B) The NIPA finds it difficult to place a value on something that is intangible. Correct: The principal problem is estimating the value of these intangibles. How much is an unlicensed patent worth? If something takes several years to develop, how could we account for a project's "value" before it is completed, not knowing if it will be completed or if it will be accepted by the market? For many intangibles, reasonable estimates could be made and included in GDP, making it a more accurate statistic of our national output.
According to By the Numbers, the personal savings rate trended upward during the last five economic recessions. What is a possible reason for an increase in savings during this period? A) increase in the per-capita income B) high unemployment and income anxiety C) increase in interest rates D) increase in the prices of the products
B) high unemployment and income anxiety Correct: In each of the last five recessions, the personal savings rate has trended upward. During economic downturns, consumers tend to save more to prepare for possible layoffs or reductions in wages.
(Figure: GDP Estimates)The table lists gross domestic product (GDP), consumption (C), gross private domestic investment (I), government spending (G), and net exports (X - M). Compute each as a percent of GDP for the five years presented. Which is the most volatile as a percent of GDP? A) consumer spending B) net exports C) investment spending D) government spending
B) net exports Correct: Net exports, followed by investment.
Which phrase correctly depicts GDP per capita? A) total input divided by the population B) total output divided by the population C) population divided by output D) population divided by input
B) total output divided by the population Correct: GDP per capita measures the total output of an economy divided by its population. Although GDP per capita provides a general indication of the standard of living, it is not a precise measure because it does not take into account differences in income distribution.
All of these are phases of the business cycle EXCEPT: A) trough. B) peak. C) stagflation. D) recovery.
C) stagflation. Correct: Business cycles are alternating increases and decreases in economic activity. Business cycles include a peak at the top of the cycle, then a downturn (recession) as the economy cools off. Eventually the economy reaches the bottom of the cycle, or the trough, followed by a recovery as business picks up and the economy heads toward another peak.
According to By the Numbers, in what year since 2005 was the difference between the unemployment rate and the real GDP growth rate the largest? A) 2006 B) 2007 C) 2008 D) 2009
D) 2009 Correct: The difference between the unemployment rate and real GDP growth was largest in 2009, which represented the trough of the business cycle when the economy was at its lowest point.
Assume that we are able to accurately account for environmental degradation in the NIPA. How should the following countries— the United States, China, and Norway— be ranked based by the percentage reduction to their GDP, from least to most percentage reduction? A) United States, China, Norway B) China, Norway, United States C) Norway, China, United States D) Norway, United States, China
D) Norway, United States, China Correct: Norway, United States, and China. (China is just now beginning to develop environmental policies to deal with air pollution from burning coal and other problems associated with its rapid growth and industrialization).
According to the circular flow model income is equal to spending. The money that people spend in the purchase of goods and services is distributed as income for the services provided by: A) labor and land. B) labor, land, and capital. C) labor, land, and entrepreneurs. D) labor, land, capital, and entrepreneurs.
D) labor, land, capital, and entrepreneurs. Correct: The circular flow diagram shows how the product and factor markets interact to produce goods and services and pay the factors of production. Ignoring some of the statistical measurement difficulties, when goods or services are produced and sold, that spending must somehow be split among the factors of production (and payments to): labor (wages), land (rents), capital (interest), and entrepreneurial activity (profits).
Gross private domestic investment (GPDI) includes new residential construction as investment. How would the sale of an existing house be treated in the GDP accounts? A) as consumption B) also as investment C) partially as consumption and partially as investment D) not included in GDP Correct: New residential construction is included in investment because of the long life of housing; you don't consume the entire housing services of a new house in the year of purchase. Sales of existing houses are not included in GDP, because GDP measures new production in that year.
D) not included in GDP Correct: New residential construction is included in investment because of the long life of housing; you don't consume the entire housing services of a new house in the year of purchase. Sales of existing houses are not included in GDP, because GDP measures new production in that year.
