Exam 1 practice Econ 104

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? A. -9.5% B. -3.5% C. 1.5% D. 3.5% E. 9.5%

D. 3.5%

The unemployment rate is defined as A. the percentage of the labor force that is employed. B. the percentage of the number employed that is unemployed. C. the percentage of the working-age population that is unemployed. D. the percentage of the labor force that is unemployed. E. the percentage of the working-age population that is employed.

D. the percentage of the labor force that is unemployed

Real GDP is GDP in a given year A. adjusted only for anticipated inflation. B. adjusted only for unanticipated inflation. C. valued in the prices of that year. D. valued in the prices of the base year.

D. valued in the prices of the base year.

The table below shows some quantity and price information for two years. Assume that the two goods shown are the only two goods produced in the economy. 2011 2015 product II Quan, price II Quan, price cheese 62, $2 87, $3 bread 145, $3 166, $5 Calculate nominal GDP in 2011.

GDP = 62*2 + 145*3 Nominal GDP (2011) = $559

The table below shows some quantity and price information for two years. Assume that the two goods shown are the only two goods produced in the economy. 2011 2015 product II Quan, price II Quan, price cheese 62, $2 87, $3 bread 145, $3 166, $5 Calculate nominal GDP in 2015

GDP = 87*3 + 166*5 Nominal GDP (2015) = $1091

What is the expenditure equation used to calculate GDP? In the United States, what is true about net exports?

GDP = Consumption + Investment + Government Purchases + Net Exports or Y = C + I + G + NX. In the U.S. net exports (NX) is negative since we import more than we export.

The formula for calculating the CPI is A. (Expenditures in the current year/Expenditures in the base year) × 100 B. (Expenditures in the current year × Expenditures in the base year)/100 C. (Expenditures in the base year/Expenditures in the current year) D. (Expenditures in the base year × 100/(Expenditures in the current year)

A. (Expenditures in the current year/Expenditures in the base year) × 100

The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is A. 5% higher in year 2 than in year 1. B. 105% higher in year 2 than in year 1. C. 5% higher in year 1 than in year 2. D. 105% higher in year 1 than in year 2.

A. 5% higher in year 2 than in year 1.

If the number employed is 190 million, the working-age population is 230 million, and the number unemployed is 10 million, then the unemployment rate is A. 5%. B. 5.2%. C. 8%. D. 10%. E. 50%.

A. 5%.

The purchase of a new automobile is included in A. consumption expenditures on services. B. consumption expenditures on nondurable goods. C. consumption expenditures on durable goods. D. investment expenditures.

C. consumption expenditures on durable goods.

Most of the unemployment that occurred during the Great Depression was A. frictional unemployment. B. structural unemployment. C. cyclical unemployment. D. core unemployment.

C. cyclical unemployment.

Since 1950, the labor force participation rate for adult men has ____ and for adult women has _____. A. increased; increased B. increased; decreased C. decreased; increased D. decreased; decreased

C. decreased; increased

The labor force equals the number of people A. employed. B. unemployed. C. employed plus unemployed. D. in the working-age population.

C. employed plus unemployed.

Which of the following is not directly counted in GDP? A. investment expenditures B. government purchases C. intermediate goods D. consumer goods

C. intermediate goods

If the GDP deflator is less than 100, then for that year nominal GDP ________ real GDP. A. equals B. is greater than C. is less than

C. is less than

The branch of economics which studies the behavior of entire economies and policies that affect the economy as a whole is called A. public economics. B. microeconomics. C. macroeconomics. D. normative economics.

C. macroeconomics.

A full-time student who is not working is categorized as A. unemployed. B. employed. C. not in the labor force. D. a discouraged worker.

C. not in the labor force.

Real GDP will increase A. only if the price level rises. B. only if the price level falls. C. only if the quantity of final goods and services produced rises. D. if either the price level rises or the quantity of final goods and services produced rises.

C. only if the quantity of final goods and services produced rises.

Disposable personal income is defined as A. personal income less personal taxes plus indirect sales taxes. B. personal income less transfer payments plus personal taxes. C. personal income less personal taxes. D. personal income less depreciation.

C. personal income less personal taxes.

In the circular flow model, firms A. have no influence on the circular flow in a market economy. B. purchase resources in the product market. C. sell goods in the product market. D. sell resources in the factor market.

C. sell goods in the product market.

Nominal GDP is GDP in a given year A. adjusted for inflation. B. adjusted for anticipated inflation. C. valued in the prices of that year. D. valued in the prices of the base year.

C. valued in the prices of that year.

What are the three big questions that any economic system must answer?

1. What goods are to be made? 2. How do we make these goods? 3. Who gets the goods that are produced?

______ exists because unlimited wants exceed the limited resources available to fulfill those wants. A. Scarcity B. Productive efficiency C. The command economy D. Economic growth

A. Scarcity

Which of the following is a normative economic statement? A. The price of milk is too high. B. The current high price of milk is the result of reduced worldwide supply. C. When the price of milk rises, the quantity of milk purchased falls. D. When the price of milk rises, the cost of milk-based products rises.

A. The price of milk is too high.

Which of the following is a factor of production? A. a factory B. a savings account at a bank C. an inventory of 20 crates of apples D. a copyrighted song

A. a factory

Structural unemployment is the result of A. a mismatch between the skills and characteristics of workers and the requirements of the jobs. B. the search process of matching workers with jobs. C. the ups and downs in inflation. D. a slowdown in the economy

A. a mismatch between the skills and characteristics of workers and the requirements of the jobs.

Voluntary exchange increases economic efficiency A. because neither the buyer nor the seller would agree to a trade unless they both benefit. B. because voluntary exchange only takes place with government permission. C. because it is free and consequently does not cost anything. D. because it allows wealthy individuals to act altruistically and give to the poor.

A. because neither the buyer nor the seller would agree to a trade unless they both benefit.

The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket. A. change; overestimates B. change; underestimates C. do not change; overestimates D. do not change; underestimates

A. change; overestimates

What is the largest component of spending in the United States? A. consumption spending B. investment spending C. government spending D. net investment spending

A. consumption spending

The size of the underground economy would tend to decrease if the government of a country A. decreased government regulations on businesses. B. made over-the-counter drugs illegal. C. increased income tax rates. D. increased business taxes.

A. decreased government regulations on businesses.

A student who just graduated from college but has not found a job would most likely be A. frictionally unemployed. B. structurally unemployed. C. cyclically unemployed. D. seasonally unemployed.

A. frictionally unemployed.

The basic economic problem of scarcity A. has always existed and will continue to exist. B. will eventually disappear as technology continues to advance. C. is a problem only in developing economies. D. does not apply to the wealthy in society.

A. has always existed and will continue to exist.

The United States has ________ social insurance programs, and generally has a ________ unemployment rate, as compared to Canada and Western Europe. A. less generous; lower B. less generous; greater C. more generous; lower D. more generous; greater

A. less generous; lower

Personal income is defined as A. national income less retained earnings plus transfer payments and plus interest on govt bonds. B. national income plus retained earnings less transfer payments and less interest on govt bonds. C. national income less depreciation. D. national income less personal taxes.

A. national income less retained earnings plus transfer payments and plus interest on govt bonds.

Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about A. one-half to one percentage point. B. one to two percentage points. C. one quarter percentage point. D. one and one-half percentage points.

A. one-half to one percentage point.

An example of an intermediate good would be A. the bread that goes into a sub sandwich that is sold by Quiznos. B. the soda pop sold by Quiznos. C. a sub sandwich sold by Quiznos. D. the potato chips sold by Quiznos.

A. the bread that goes into a sub sandwich that is sold by Quiznos.

If cyclical unemployment is eliminated in the economy, then A. the economy is considered to be at full employment. B. the unemployment rate is below the natural rate of unemployment. C. the unemployment rate is above the natural rate of unemployment. D. the economy is at less than full employment.

A. the economy is considered to be at full employment.

Which is an example of spending on goods and services in the circular flow model? A. Fred buys a new wrench for his auto shop business. B. Penny buys an airline ticket from State College to London for her vacation. C. Juan buys a lawn mower to use in his landscaping business. D. Mary buys a weight machine for use in her physical therapy business.

B. Penny buys an airline ticket from State College to London for her vacation.

If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years? A. The cost of living has increased by 6%. B. The cost of living has increased by 2.9%. C. The cost of living has increased by 12.7%. D. The cost of living has decreased by 6%

B. The cost of living has increased by 2.9%

Which of the following best describes an assumption economists make about human behavior? A. They assume that individuals act rationally all the time in all circumstances. B. They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time. C. They assume that people take into account the question of fairness in all decisions they make. D. They assume that individuals act randomly.

B. They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time.

Which of the following is a positive economic statement? A. The inflation rate in the United States is too high. B. Unemployment insurance payments increase when the unemployment rate rises. C. The government should defund welfare programs. D. States should be able to enact their own marijuana legalization laws.

B. Unemployment insurance payments increase when the unemployment rate rises

Trade-offs force society to make choices when answering what three fundamental questions? A. What will be the prices of goods and services; how will these goods and services be produced; and who will receive them? B. What goods and services to produce; how will these goods and services be produced; and who receives them? C. Who gets jobs; what wages do workers earn; and who owns what property? D. How much will be saved; what will be produced; and how can these goods and services be fairly distributed?

B. What goods and services to produce; how will these goods and services be produced; and who receives them?

Which of the following is part of an economic model? A. preferences of economic agents B. data C. norms D. opinions

B. data

Gross domestic product in the economy is measured by the A. total number of goods and services produced in the economy. B. dollar value of all final goods and services produced in the economy. C. total number of goods produced in the economy. D. total number of services produced in the economy.

B. dollar value of all final goods and services produced in the economy.

The natural rate of unemployment is the amount of unemployment A. associated with the business cycle. B. equal to frictional plus structural unemployment. C. that exists when the economy goes into recession. D. that exists when the economy is in an expansion.

B. equal to frictional plus structural unemployment.

The size of the underground economy would tend to increase if the government of a country A. decreased government regulations on businesses. B. increased income tax rates. C. legalized prostitution. D. legalized marijuana.

B. increased income tax rates.

The purchase of a new house is included in A. consumption expenditures. B. investment expenditures. C. government purchases. D. net exports.

B. investment expenditures.

The cost to firms of changing prices A. is small even when there is rapid inflation. B. is called a menu cost. C. does not exist if inflation is perfectly anticipated. D. all of the above

B. is called a menu cost.

The unemployment rate equals the number of unemployed divided by the ________, all times 100. A. number of employed B. labor force C. working-age population D. total population

B. labor force

Statistics on real GDP during World War II may give a misleading indication of whether World War II was a period of prosperity because A. inflation may have been considerably higher than estimated. B. most of the increased production was for military goods, not consumption goods. C. government agents purposely inflated production numbers to maintain American support for war. D. government agencies were shorthanded and did a particularly poor job of collecting data.

B. most of the increased production was for military goods, not consumption goods.

When goods and services are produced at the lowest possible cost, ________ occurs. A. allocative efficiency B. productive efficiency C. equity D. efficient central planning

B. productive efficiency

In the circular flow model, households A. purchase final goods and services in the factor market. B. purchase final goods and services in the product market. C. purchase resources in the product market. D. purchase resources in the factor market.

B. purchase final goods and services in the product market.

The advice to "retrain" would be most appropriate for which of the following types of unemployment? A. frictional unemployment B. structural unemployment C. cyclical unemployment D. core unemployment

B. structural unemployment

Compare and contrast communism and socialism with regards to their basic philosophy, economic planning, ownership of resources, distribution of goods, and class distinction.

Basic Philosophy: Communism- From each according to his ability, to each according to his needs. Socialism-From each according to his ability, to each according to his contribution. Economy Planned by: Communism- Central government Socialism- Central government Ownership of Economic Resources: Communism- Resources are publicly owned and controlled by the government. Individuals hold no property or assets. Socialism- Individuals own personal property but all industrial and production capacity is communally owned and managed by a democratically elected government. Distribution of Economic Production: Communism- Production is intended to meet all basic human needs and distributed to the people at no charge. Socialism- Production is intended to meet individual and societal needs and distributed according to individual ability and contribution. Class Distinction: Communism- Class is abolished. The ability to earn more than others is almost nonexistent. Socialism- Classes exist but differences are diminished. It is possible for some people to earn more than others.

The labor force participation rate equals the A. (number of employed divided by the labor force) × 100. B. (labor force divided by the number of people not in the labor force) × 100. C. (labor force divided by working-age population) × 100. D. (labor force divided by the total population) × 100.

C. (labor force divided by working-age population) × 100.

Which of the following is a problem inherent in centrally planned economies? A. There are no problems and everyone, including consumers, is satisfied. B. There is too much production of low-cost, high-quality goods and services. C. Production managers are more concerned with satisfying government's orders than with satisfying consumer wants. D. Unemployment is too high.

C. Production managers are more concerned with satisfying government's orders than with satisfying consumer wants.

The term "market" in economics refers to A. a place where money changes hands. B. a legal institution where exchange can take place. C. a group of buyers and sellers of a product and the arrangement by which they come together to trade. D. an organization which sells goods and services.

C. a group of buyers and sellers of a product and the arrangement by which they come together to trade.

An example of a transfer payment is A. a teacher's paycheck. B. a paycheck for a member of the National Guard. C. a welfare payment. D. a purchase of a new bridge in Ohio.

C. a welfare payment.

Suppose that in 2024, all prices in the economy double and that all wages and salaries also double. In 2024 you A. are worse off than you were in 2023 as you can no longer afford to buy as many goods and services. B. are better off than you were in 2023 as your salary is higher than it was in 2023 and you can now buy more goods and services. C. are no better off or worse off than you were in 2023 as the purchasing power of your salary has remained the same. D. cannot determine whether you are better off or worse off than you were in 2023, because the purchasing power of your salary cannot be determined.

C. are no better off or worse off than you were in 2023 as the purchasing power of your salary has remained the same.

Economics promotes which of the following as the way to make the best decision? A. Continue an enjoyable activity as long as you do not have to pay for it. B. Continue an enjoyable activity until it is no longer enjoyable. C. Continue an enjoyable activity until you cannot afford to pursue it. D. Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

D. Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

If the CPI changes from 125 to 120 between 2021 and 2022, how did prices change between 2021 and 2022? A. Prices increased by 5%. B. Prices decreased by 5% C. Prices increased by 25%. D. Prices decreased by 4%.

D. Prices decreased by 4%

Which of the following describes a situation in which the person is hurt by inflation? A. a retiree whose pension is adjusted for inflation B. a person who borrows money during a period when inflation is under-predicted C. a person who lends money during a period when inflation is over-predicted D. a person paid a fixed income during an inflationary period

D. a person paid a fixed income during an inflationary period

Cyclical unemployment is the result of A. a mismatch between the skills and characteristics of workers and the requirements of the jobs. B. the search process of matching workers with jobs. C. the ups and downs in inflation. D. a slowdown in the economy.

D. a slowdown in the economy.

Which of the following policies would reduce frictional unemployment? A. a decrease in the minimum wage B. a job retraining program C. implementing an unemployment insurance policy D. building an online job database that helps workers find jobs

D. building an online job database that helps workers find jobs

Which of the following would be the best measure of the cost of living? A. real GDP B. real GDP per person C. GDP deflator D. consumer price index

D. consumer price index

A transfer payment is a payment by the government to an individual A. for a service. B. for an investment good. C. for a consumption good. D. for which the government does not receive a good or service in return. E. for a debt owed.

D. for which the government does not receive a good or service in return.

Nominal GDP will increase A. only if the price level rises. B. only if the price level falls. C. only if the quantity of final goods and services produced rises. D. if either the price level or the quantity of goods and services produced rises.

D. if either the price level or the quantity of goods and services produced rises.

A final good is one that A. is used in the production of another good. B. is a natural resource used to produce a good. C. is purchased as an input in the production process. D. is purchased by its final user.

D. is purchased by its final user.

The real interest rate equals the nominal interest rate ________ the inflation rate. A. times B. divided by C. plus D. minus

D. minus

The purchase by a household in China of a book produced in the United States is included in U.S. A. consumption expenditures. B. investment expenditures. C. government purchases. D. net exports.

D. net exports.

The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket. A. also; understate B. also; overstate C. not; understate D. not; overstate

D. not; overstate

The Bureau of Labor Statistics would categorize a retiree who is not working as A. employed. B. unemployed. C. a discouraged worker. D. out of the labor force.

D. out of the labor force.

Full employment is not considered to be zero unemployment, because A. some cyclical unemployment always exists. B. some people do not want a job. C. there are not enough jobs for everyone who wants one. D. people do not find jobs instantaneously.

D. people do not find jobs instantaneously.

In the circular flow model, households A. sell goods and services in the factor market. B. and firms spend earnings from input sales on goods and services in the factor market. C. hire resources sold by firms in the factor market. D. sell labor inputs in the factor market and buy goods and services in the product market.

D. sell labor inputs in the factor market and buy goods and services in the product market.

Discouraged workers are A. workers who have a part time job but want a full time job. B. workers who find their current jobs unfulfilling and are considering a job change. C. workers who have consistently been looking for work for more than 4 weeks. D. workers who have stopped looking for work because they believe there are no jobs for them.

D. workers who have stopped looking for work because they believe there are no jobs for them.

If the number employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the labor force participation rate is A. 4%. B. 5.2%. C. 60%. D. 76%. E. 80%.

E. 80%.

The labor force participation rate is defined as A. the percentage of the working-age population that is employed. B. the percentage of the working-age population that is unemployed. C. the percentage of the labor force that is employed. D. the percentage of the labor force that is unemployed. E. the percentage of the working-age population in the labor force.

E. the percentage of the working-age population in the labor force.

The entire working-age population of Henderson is 940. In this population, there are 120 retired people, 84 unemployed people, and 540 employed people. All others are full-time students who are not working. What is the employment-population ratio?

Employment-Population ratio = (employed / working age population)*100 (540 / 940)*100. The employment population ratio in Henderson is 57.45%

The table below shows some quantity and price information for two years. Assume that the two goods shown are the only two goods produced in the economy. 2011 2015 product II Quan, price II Quan, price cheese 62, $2 87, $3 bread 145, $3 166, $5 Calculate the GDP deflator between the years 2015 and 2011

GDP deflator = (nominal GDP / Real GDP ) * 100 GDP deflator = (1091/672) * 100 = 162.35 This means prices increased by 62.35% over the time period! That is a lot.

The table below shows some quantity and price information for two years. Assume that the two goods shown are the only two goods produced in the economy. 2011 2015 product II Quan, price II Quan, price cheese 62, $2 87, $3 bread 145, $3 166, $5 Calculate Real GDP in 2015 using 2011 as a base year.

Here, we use 2015 quantities but 2011 prices! Real GDP = 87*2 + 166*3 Real GDP (2015) = $672

In economics, we describe markets as "efficient". What does this mean? While markets promote efficiency, why might it not always happen?

In short, it means that markets are more capable of providing and meeting the needs of a variety of people moreso than centrally-planned economies. Markets promote productive efficiency, which means goods get produced at the lowest cost as a result of competition among firms. Allocative efficiency means that markets get the correct quantity of goods produced so there are no shortages or surpluses. Efficiency may not always be reached, at least right away. This may be due to time lags, imperfect information, government intervention or regulations, or externalities.

In the decision to have an economy lean more toward capitalism or more toward social democracy, what is the main point of debate?

It comes down to how much government should be involved in the distribution and allocation of resources. In a capitalist (free market) system, markets and the forces of supply and demand are going to the primary method in which most goods are produced and distributed. In a social democracy, the goal is to eventually have universally used services (or things that some would consider to be "basic human rights") distributed and provisioned by government and provided to all. Examples of such goods and services could include health care, higher education, public transport, utilities, internet access, or in the most extreme case, even housing for everyone. The debate is what goods should government provide vs. the market, and which can do a more efficient job at meeting the needs of individuals and society as a whole.

The entire working-age population of Henderson is 940. In this population, there are 120 retired people, 84 unemployed people, and 540 employed people. All others are full-time students who are not working. How many people are in the labor force in Henderson?

Labor Force = employed + unemployed 540 + 84. There are 624 people in the labor force.

Briefly describe scarcity.

People have unlimited wants and limited resources to produce those wants. Scarcity means we do not have enough resources to give everyone all of their wants for free. Scarcity forces us to allocate resources among competing desires. Scarcity forces us to make choices.

The entire working-age population of Henderson is 940. In this population, there are 120 retired people, 84 unemployed people, and 540 employed people. All others are full-time students who are not working. What is the unemployment rate in Henderson?

Unemployment rate = (unemployed people / labor force)*100 (84 / 624)*100. The unemployment rate in Henderson is 13.46%.

The table below shows some macroeconomic data for Mexico. Wages $3220 Government purchases $2350 Exports $310 Pollution Damages $560 Investment expenditures $700 Consumption expenditures $5150 Imports $820 Intermediate Goods $1000 Given the information above, use the expenditure approach to calculate Mexico's GDP for the year.

Y = C + I + G + NX. Y = $5150 + $700 + $2350 + $310 - $820 Y = $7690