Macroeconomics Midterm #1

You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully

Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased.

An Italian company opens a pasta company in the U.S. The profits from this pasta company are included in

U.S. GDP and Italian GNP

The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result,

U.S. government purchases increase by $30,000 and U.S. net exports decrease by $30,000. U.S. GDP and GNP are unaffected

Identify the immediate effect of each of the following circumstances on U.S. GDP and its components a. James receives a Social Security check. b. John buys an Italian sports car. c. Henry buys domestically produced tools for his construction company.

a. Since this is a transfer payment, there is no change to GDP or to any of its components. b. Consumption and imports will rise and cancel each other out so that there is no change in U.S. GDP. c. This increases the investment component of GDP and so increases GDP.

If a tax is imposed on a market with inelastic demand and elastic supply,

buyers will bear most of the burden of the tax

A legal maximum price at which a good can be sold is a price

ceiling

A binding price ceiling is imposed on the market for peaches. At the ceiling price, the quantity demanded of peaches will be

greater than the quantity supplied.

Over the last few decades Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself,

increased measured GDP

A U.S. publisher purchases new computers. This purchase by itself makes

investment and GDP higher

A price floor

is a legal minimum on the price at which a good can be sold

David is a chef at a restaurant. Roberta prepared her own meals during the first quarter of 2008, and then ate at David's restaurant every day in the second quarter of 2008. Roberta's change of habit

necessarily raises GDP

To encourage formation of small businesses, the government could provide subsidies; these subsidies would

not be included in GDP because they are transfer payments

A tax placed on the seller of a product will

raise equilibrium price and lower equilibrium quantity

A tax on the sellers of cell phones will

reduce the size of the cell phone market

Water shortages can be most efficiently eliminated even in times of drought if

the market is allowed to adjust freely