Macroeconomics 102 final study guide

Which of the following scenarios illustrates the law of demand?

Kathleen eats more steak when the price is low, and less when the price is high.

Which statement is TRUE, according to standard economic theory?

The true cost of a choice is what you must give up when choosing between alternatives.

Transfer payments:

are a redistribution of funds from one individual to another individual.

Sunk costs are costs that

are incurred in the past and cannot be reversed.

If an economy has an output gap of 0%, this means the economy is:

at its highest sustainable rate of production.

Surpluses always occur

at prices above the equilibrium price.

When inflation rises unexpectedly, borrowers will _____, and lenders will _____.

benefit; be hurt

The cost-benefit principle states that a decision should be pursued only if the

benefits are greater than the costs.

In periods of unexpected inflation:

borrowers benefit, since they repay their loans in dollars whose real value has declined.

The poverty line is adjusted each year to reflect:

changes in the cost of living.

Rapid growth in poorer countries leads to:

convergence in real GDP per person between poorer countries and richer countries.

The risk premium is the:

extra interest charged by lenders to account for risk.

The inflation rate is the:

percentage change in the price level from one year to the next.

Real per capita GDP is:

real GDP divided by the population.

In an economy whose aggregate real output is growing faster than the total population:

real GDP per capita is rising.

The broadest measure of economic activity is:

real GDP.

The _ interest rate ___.

real; can be zero, positive, or negative

In 1798, the English economist Thomas Malthus predicted that:

rising population growth would cause productivity per capita to fall.

In macroeconomics, the difference between saving and investment is that:

saving is the money left over after paying for spending, and investment is the purchase of new capital.

A trade-off involves weighing:

costs and benefits.

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost.

go; greater

Which item would NOT be included in GDP?

the dollar value of a repair job done by your cousin on her own car

In the long run, an increase in saving will generally:

increase the rate of economic growth.

A growing number of utility companies are using drones for site inspections. What is the effect of these changes on the equilibrium price and quantity, in the market for drones?

Both the equilibrium price and the equilibrium quantity will rise

Maria's Pizza offers one slice for $2, two slices for $3.50, three slices for $4.50, and four slices for $5.00. Gil orders two slices. From this information, we know that the marginal benefit to Gil of a second slice is at least _____, and the marginal benefit to Gil of a third slice is less than _____.

$1.50; $1.00

An automobile manufacturer installs a conveyor belt system for $670,000. The depreciation rate is 10% at the end of next year. The real interest rate is 6%. What is the user cost of the conveyor belt system for one year?

$107,200

If the interest rate is 4%, what is the approximate future value of $15,000 in 10 years?

$22,204

Mark earns $3,800 in the current period. His consumption in this same period is $4,100. Which of the following is true?

His dissaving is $300.

Which of the following tax systems is progressive? Corinne pays a 10% tax on the first $10,000 she earns plus _____ tax on any additional income.

a 25%

A downward shift of the consumption function can be caused by:

a decrease in wealth.

If there is news of a future rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

a large increase; no change

Efficiency wages are:

above-equilibrium wages designed to encourage better performance.

You go to Starbucks and see that the price of your favorite tall vanilla latte has gone up by 25 cents. All sizes of the vanilla lattes are now more expensive. As a result of this price increase, you would expect to see a

fall in the quantity demanded of vanilla lattes.

Unemployment due to the time workers spend in job search is _____ unemployment.

frictional

The output gap allows us to capture:

the economy's deviations from potential GDP.

The law of demand refers to

the inverse relationship between price and quantity demanded.

The law of supply refers to

the positive relationship between price and quantity supplied.

Cedar point amusement park reduces its entry fees. As a result of this price fall,

the quantity demanded will be higher.

The MOST important use of GDP is as a measure of:

the size of the economy.

An example of a leading indicator is:

the stock market.

Which of the following is consistent with the view that "fairness" means equality of outcomes?

equal incomes

The news of an impending recession in the economy will lead to a: (i) fall in consumption.(ii) rise in precautionary saving.(iii) rise in national saving.(iv) rise in consumption.

(i), (ii), and (iii)

You open an investment account that earns a nominal interest rate of 4.2% a year. The current consumer price index is 108. In one year, the consumer price index is expected to go to 112. What is your expected real rate of return?

0.5%

A fixed nominal interest rate of _____ with _____ inflation will yield the highest real rate of return for a lender.

7%; 2%

The equilibrium unemployment rate cannot be equal to zero because:

it is the sum of the frictional and structural unemployment rates.

An example of human capital is a person's:

job skills.

Suppose that an economy is in a recession. You would expect to see the unemployment rate:

rise above the equilibrium unemployment rate.

If government expenditure rises by $40 billion and the multiplier in the economy is 2.5, then real GDP_____, and the IS curve shifts to the_____.

rises by $100 billion; right

Inflation is a(n):

rising aggregate price level.

Diminishing marginal product leads to

rising marginal costs for a seller.

Investment refers to:

spending on physical capital.

If expected future profits in an industry fall,

supply will shift left.

It is a beautiful afternoon, and you are considering taking a leisurely stroll through the park. Your alternatives to walking are streaming a movie that you value at $5, taking a nap that you value at $7, or reading a new book that you value at $12. What is the opportunity cost to you of taking the stroll through the park?

$12

A university student faces the difficult decision of how to spend one hour tonight. She could babysit her professor's child at an hourly wage of $10; she could work at the college library at a wage of $12; or she could finish her economics homework assignment. If she chooses to complete her homework assignment, she has incurred an opportunity cost equal to:

$12.

In a simple, closed economy (no government or foreign sector), if income increases by $100, and $30 is saved, _____ will go to consumption.

$70

Janelle loves sashimi. Her first piece of sashimi normally gives her a marginal benefit of $5. Each additional piece yields a marginal benefit that declines by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sashimi, how many pieces should she eat?

10

If the labor force totals 100 million workers, and 90 million are working, then the unemployment rate is _____.

10%

Unemployment rates are usually highest for:

African American teenagers.

Which of the following scenarios depicts a rational buyer?

Damien chooses to buy a sandwich for $5 when the marginal benefit of the sandwich to him is $7.

A bakery hires a baker who can make 15 cakes per day. The bakery then decides to hire a second baker who will use the kitchen at the same time as the first baker. The bakery finds that the second baker can produce only an additional nine cakes per day. What concept does this scenario illustrate?

Diminishing marginal product

Which of the following correctly describes the business cycle?

It is the fluctuations of GDP around the potential output.

Which of the following will rise when the economy is expanding?

Real GDP growth

What affect will the release of the new Mercedes E-Class sedan have on last year's models that are still on the dealers' lots? Use supply and demand concepts to do your analysis.

The arrival of the new E-Class would lead to a decrease in demand for last year's model and their prices would fall.

How does the law of diminishing marginal utility relate to changing income?

The marginal benefit of an extra dollar of income falls as income rises.

Which of the following is NOT a factor that can shift supply?

The market price of a product.

Deflation is a:

decreasing aggregate price level.

If an aircraft is found to have software problems that could lead to a malfunction, the effect on the aircraft market will be that the

demand will decrease, and the price of the aircraft will fall.

Typically, business cycles:

have short and sharp recessions, followed by long and gradual expansions.

Purchases of foreign-produced goods and services are:

imports.

The construction of new housing is considered part of:

investment spending.

The intersection of the IS curve and the MP curve determine:

macroeconomic equilibrium.

Underemployed people are counted as employed, even though they are _____.

not fully using their skills

The rate of unemployment is found by dividing the:

number of people not working but seeking work by the sum of the number of people not working but seeking work and the number of people employed.

Among the factors that are important for modern economic growth are:

property rights.

A worker classified as frictionally unemployed is one who is:

unemployed while looking for a job that suits his or her skills.

An example of a lagging indicator is:

unemployment.

If the price level at the end of year 1 is 110, and the price level at the end of year 2 is 120, the inflation rate in year 2 is _____.

8.3%

Which of the following scenarios does NOT depict a rational seller?

Main Street Bakery calculates the marginal cost of a multilayer red velvet cake sd $9 and sells it for $8.

Which of the following is an investment?

Marios builds a new house.

You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project. Up-front cost: $350,000 Next year's revenue: $45,000 Real interest rate: 8% Depreciation rate: 10% How much profit does the project yield, and should your client invest in this project?

No, the client should not invest because the project yields a $100,000 loss.

There are empty candy shelves at Walmart on the day before Halloween. Which of the following explains this event?

There is a shortage in the candy market.

Which of the following indicators will probably rise when the economy is in a recession?

Unemployment

_____ is estimated by asking: "What is the _____ I am willing to pay to get this benefit (or avoid that cost)?"

Willingness to pay; most

If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who are unemployed and have given up looking for a job, and 5 million people who are unemployed and seeking employment, then its labor force is _____ million.

140

If the risk-free rate is 1.5% and the risk premium is 2%, the MP curve is at:

3.5%.

Junko is a single mother who earns $17,000 per year. She receives $3,000 per year in in-kind transfers and a $1,000 earned income tax credit. If her earned income rises to $22,000, she will lose the tax credit and $500 of her in-kind transfer benefits. What is Junko's effective marginal tax?

30.0%

Which of the following is not a demand shifter?

The price of the product.

Depreciation refers to the:

decline in capital due to wear and tear, obsolescence, accidental damage, and aging.

Last month, Brayton lost his job at the local auto parts factory when the factory relocated. Brayton and his former coworkers have been looking for similar jobs, but they have found no openings. In Brayton's town, the _____ labor has _____.

demand for; fallen

Cyclical unemployment is unemployment:

due to a temporary downturn in the economy.

As a result of technological innovation, automated water pumps are being installed on the farms of Kenyan tomato farmers. As a result of the increased use of automated water pumps, the equilibrium price of tomatoes will:

fall, due to a rise in supply.

The threat of future inflation:

makes people reluctant to lend money for long periods.

The opportunity cost of an extra dollar of consumption today is the:

marginal benefit of consuming a dollar-plus-interest in the future.

The level of household income at which half of the households in the population earn more and half of the households in the population earn less is the:

median household income

A market consists of ten similar suppliers that are making the same supply decisions. To find the market supply of these ten suppliers, you:

multiply the individual supply of one of the suppliers by ten.

Suppose that the price of rare earth metals is increasing (this is one of the main components of most smartphones). As a consequence, people expect the price of smartphones to rise next year. Therefore, people will MOST likely:

observe higher prices for smartphones this year.

The minimum annual income, of which a family that earns a lower amount is considered in poverty, is the:

poverty line.

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

scarcity.

If income increases:

there will be a rightward movement along the consumption function.

The capital stock in an economy is the:

total quantity of capital at a point in time.