Economic Exam 1 Review

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Economics is a social science because

All of the above

Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?

All of the above

How does real GDP deal with the problem inflation causes with nominal GDP

All of the above

When the economy is at full employment

All of the above

Which of the following events would create economic growth, that is, shift the production frontier outward?

All of the above

Why in microeconomics can we measure production in terms of quantity, but in microeconomics we measure production in terms of market value?

All of the above

Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness economy?

All of the above

August 2013

Both A and B are true

Societies organize their economies in two main ways to answer the three questions of what, how, and who. A society can have a _________ economy in which the government decides how economic resources will be allocated. Or a society can have a ________ economy in which the decisions of households and firms interacting in market allocate economic resources

Centrally planned; market

The price index which is used to measure changes in the cost of living is the

Consumer Price Index (CPI)

a. You purchase a new Ford Escape Hybrid from a Ford dealer

Consumption Expenditure

What are the four major components of expenditures in GDP

Consumption, Investment, Government Purchases, and Net Exports

Which of the following is NOT considered one of the potential biases in calculating the consumer price index?

Coverage bias

Which of the following is NOT a step that the economists use in developing a useful economic model

Make a value of judgement about the merits of the hypothesis

A primary difference between macroeconomics and microeconomics is

Microeconomics examines individual markets while macroeconomics examines the economy as a whole

Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer inShanghai, China

Net Export Expenditure

Which of the following choices shows how data on nominal wages for 2007 to 2013 and data on the consumer price index for the same years can be used to calculate the real wage for these years?

Nominal wages/ Price index *100= real wages

Ford purchases door handles for the Escape from an auto parts manufactuer in Indianan

Not included in GDP calculation

b. You purchase a 2011 (preowned) FordEscape from a friend

Not included in GDP calculation

What points are inefficient? Briefly explain why.

Point V because production there is not using all available resources

At which point is the country's future growth rate likely to be the highest? Briefly explain why.

Point W because it is where the mos resources are used to produce capital goods

Which point(s) are unattainable? Briefly explain why

Point Z becuase it is outside the production possibilities frontier

What point(s) are efficient? Briefly explain why.

Points W, X, and Y becuase this is where the maximum output is produced with available resources

____________ is concerned with what is, and ________ is concerned with what ought to be. Economics is about ____________, which measures the costs and benefits of different courses of actions

Positive analysis, normative analysis; positive analyisis

while equity means that goods are distributed in a way that is

fair

The financial system of a country is important for a long-run economic growth becaue

firms need the financial system to acquire funs from households

The three types of unemployment are

frictional, structural and cyclical unemployment

A person who is in between jobs but actively engaged in a job search is considered

frictionally unemployed

Centrally planned economics allocate resources based on decisions by

government

Crowding out occurs when

governments must borrow funds which causes interest rates to rise and thus private investment is reduced

Potential real GDP

grows over time

The minimum wage law

has only a small effect on the unemployment rate since only a small part of the labor force earns the minimumwage

while market economies answer these questions through decision made by

household and firms

Scarcity implies that every society and every individual face trade-offs because scarcity means that

human wants are greater than what available resources can produce

Government unemployed insurance tends to

increase the unemployment rate by lowering the opportunity cost of job search

An efficiency wage

increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied

The rule of 70

is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double

Efficiency means that goods are distributed in a way that

maximizes benefits to society

A _______ economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources

mixed

The difference between a nominal variable and a real variable is that

nominal variables are calculated in current-year prices....

Some countries have larger underground economies than do other countries

of government policies that are retarding economic growth

The payment of government unemployment insurance reduces the severity of recession by

preventing a huge drop in income...

Which of the following is the best measure of the standard of living of the typical person in a country?

real GDP per person

The effect of labor unions on overall unemployment is ________ since only a _________ percentage of the laborforce outside the government is unionized

small; small

A type of unemployment most likely to result in hardship for the people who are unemployed is

structural because this type of unemployment requires retraining to acquire new job skills

Experts in hand-drawn animation who remain unemployed due to the film industry's switch to computer

structurally unemployed

By definition, economics is the study of:

the choices people make to attain their goals, given their scarce resources

Opportunity cost is

the highest valued alternative that must be give up to engage in an activity

In determining whether to borrow funs, firms compare the rate of return they expect to make on an investment with

the interest rate they must pay to borrow the necessary funds

Potential real GDP is

the level of GDP attained when all firms are producing at capacity

Macroeconomics conditions affect the decision firms and families make....

the probability of finding a job is higher during economic expansion and lower during recession

The law of demand is the assertion that

the quantity demanded of a product is inversely related to its price

The two key factors that cause labor productivity to increase over time are

the quantity of capital per hour worked and the level of technology

An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,

the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power

Suppose that there are three variables involved in the graph to the right...

the third variable

Which of the following factors determines the supply of loanable funds?

the willingness of households and governments to save

Transfer payments are not included in GDP calculations because

transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service

Nominal GDP is GDP in a given year

valued in the prices of that year

Real GDP is GDP in a given year

valued in the prices of the base year

The distinction between a normal and an inferior good is

when income increases, demand for a normal good increases while demand for an inferior good falls.

Unemployment rate in France

would have gone up as the opportunity cost of job search would have decreased

Which one of the following expressions shows the investment-saving equality?

S=Y-C-G

Which of the following steps has not been taken by the Bureau of LaborStatistics (BLS) to reduce the size of biases in the CPI

The BLS has expanded the number of stores from which it connects the price in information to reduce the coverage bias

What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy.

The country is operating on its production possibilities fronteir

Relative to the household survey, which of the following is a strength of the establishment survey?

The establishment survey is determined by actual payroll, rather than by the unverified answers of the household survey

What are the implications of this idea for the shape of the production possibilities frontier?

The production possibilities frontier will be bowed outward

What will be the effect of an increase in business taxes on the quantity of investment by firms and the economy's capital stock in the future?

The quantity of investment will decrease and the economy's future capital stock will decrease

Currently, the Bureau of Labor Statistics does not included homemakers...

The unemployment rate would decrease and the labor force participation rate would increase

How would it affect the unemployment rate is the Bureau of Labor Statistics counted as unemployed both (1) discouraged workersand (2) people who work part-time but would prefer to work full-time

The unemployment rate would increase

Which of the following is NOT one of the conditions someone needs to meet to be counted as unemployed?

They had worked only one hour per week during the previous four weeks

The unemployment rate is calculated as follows

Unemployment rate = Number of Unemployed/ Labor Force *100

The three economic questions that every society must answer are:

What goods will be produced, how they will be produced, and who will receive the goods

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?

When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities

Which equation represents the relationship between GDP and the four major expenditure components

Y=C+I+G+NX

What does increasing marginal opportunity cost mean?

Increasing the production of a good requires larger and larger decreases in the production of another good

e. Ford purchases new machine tools to use in its Missouri Escape factory

Investment Expenditure

Refer to the graph to the right. What is the opportunity cost of moving from point B to point C?

20 sedans (quantity)

According to the law of supply

A and C only ( here is a positive relationsjip; as the price of a product increases, firms will supply more of it to the marker

Indicate which of the following would cause a movement from point A to C (check all that apply)

A rise in the number of buyers; A decline in vegetarianism

"I don't believe in the government price statistics. The CPIfor 2012 was 212, but I know the inflation ratecouldn't have been as high as 112 percent in 2012

Disagree. The inflation rate is the percentage increase in the price level from the previous year, not the base year

"In years when people buy few shares of stock, investment will be low and, therefore, so will GDP"

Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases

What is Costco's CEO referring to?

Efficiency wages

In circular flow of expenditure and income, why must the total value of production is an economy equal the total value of income?

Every penny spent on a good or service must end up as someone's income

How is the GDP deflator calculated?

GDP deflator= Nominal GDP / Real GDP * 100

How does the size of a country's GDP affect the quality of life of the country's people

Generally, the more goods and services people have, the better off they are

The state of Missouri builds a new highway to help access to the Ford Escape plant

Government Expenditure

GDP is an imperfect measure of economic well-being because it fails to measure what types of production?

Household production and the underground economy

A production possibilities frontier (PPF) is

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

The shift from S1 to S2 represents _______ in the supply of loanable funds

a decrease

The movement from point A to B on D1 is caused by

a decrease in the price of baskets of traditional wings

During an economic expansion, a person would prefer to work in an industry that produces

a normal good because the demand for normal goods should increase with increases in income during economic expansion

Indicate which of the following statements represent positive analysis or normative analysis a. A 50-cent-per-pack tax on cigarettes by teenagers by 12% b. The federal government should spend more on AIDS research c. Rising paper prices will increase textbook prices. d. The price of coffee at Starbucks is too high

a. positive analysis b. normative analysis c. positive d. normative

When economists speak of a surplus, they mean a situation in which

all of the above

Recall the definition of normal and inferior goods...

an inferior good because the demand for inferior goods should increase with decreases in income during a recession

Market price is determined by

both supply and demand

An underground economy involves all of the following except

buying and selling of goods and services by obtaining a permit from the government

When a company reduces production and employment during economic recession, those employees who lose their job are generally

cyclically unemployed

With the shift in supply, the equilibrium quantity of loanable funds

decrease

When business taxes increase, the equilibrium interest rate_________ and the equilibrium quantity of loanable funds ________

decreases; decreases

With the changes in the equilibrium quantity of loanable funds, the quantity of saving_______ and the quantity of investment ________

decreases; decreases


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