Monetary and Fiscal Policy

In many developing countries, the informal sector is ___________ because taxes are __________ and government regulations are __________.

B. large; high; extensive informal sector???

If the base year is 2001, what is generally true of the relationship between nominal GDP and real GDP?

C. RGDP < NGDP because prices are rising.

When a consumer purchases a new computer, how is that purchase counted in GDP?

C. by counting only the value of the computer and ignoring the value of the components.

Which of the following is true about the consumption component of U.S. GDP in 2008?

Consumer spending on services was greater than the sum of spending on durable and nondurable goods. ???

Indicate whether you agree or disagree with the following statement: "Whenever real GDP declines, nominal GDP must also decline."

Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.

is equal to personal income minus personal tax payments.

Disposable Personal Income

If you were attempting to forecast the level of consumer spending by households, which measure of total production or total income might be most helpful in making your forecast?

Disposable personal income

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

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

When accounting for exports and imports in GDP, which of the following is correct?

Exports are added to the other categories of expenditures.

True or False: The value of GDP is reduced to reflect the impact of pollution generated by production.

False; GDP does not subtract "bads" generated by production

True or False: In the United States, household production and the underground economy is about 50 percent of GDP.

False; about 10%

True or False: Personal income is the best measure of the income households have available for spending.

False; disposable personal income is better because it subtracts taxes.

True or False: For every year, nominal GDP is always greater than real GDP.

False; this is true only for years where prices are greater than base year prices

A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.

GDP deflator

If we add up the value of every final good and service produced in the economy, we must get a total that is exactly equal to the value of:

all of the income in the economy.

Household production and the underground economy

are important but unaccounted for in the Commerce Department's estimate of GDP.

Which of the following is counted in the gross private domestic investment category used by the Bureau of Economic Analysis when measuring GDP?

business fixed investment, residential investment, changes in business inventories

How does the Bureau of Economic Analysis of the U.S. Department of Commerce measure GDP?

by adding the value in dollar terms of all of the final gods and services produced domestically.

What are the factors of production?

capital, natural resources, entrepreneurship

Which is the largest component of GDP?

consumption

GDP includes only __________ production.

current / takes place during the indicated time period

According to most economists, is not counting household production or production in the underground economy a serious shortcoming of GDP?

most economists would answer :no" because these types of production do not affect the most important use of the GDP measure, which is to see how the economy is performing over short periods of time.

In an economy with rising prices, compared to the base year,

nominal GDP i larger than real GDP in years after the base year.

Using the year 2000 as the base year, and assuming that prices during the 1990s were lower on average than prices in 2000, we can conclude that

nominal GDP was lower than real GDP in the 1990s. ???

Which is counted in this year's GDP?

only this year's production of goods and services.

Disposable personal income is equal to:

personal income minus personal tax payments plus government transfer payments.

If the GDP deflator has a value of 105.0, then

prices have risen 5% since the base year

Over time, prices may change relative to each other. To allow for this, the Bureau of Economic Analysis calculates

real GDP and the price deflator using chain weights.

Total income in the economy equals the sum of wages, interest, ____________ and ____________.

rent; profit

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

If, in macroeconomics, we measured production using quantities, we would add tons of wheat grown by U.S. farmers to the number of iPods produced by Apple, to gallons of milk, and so on. When we measure total production, we can't just add together the quantities of every good and service because the result would be meaningless. Measuring production using market value in dollar terms allows us to add together many different goods and services.

The total national income actually received by a country's residents is

smaller than the value of GDP. ???

Suppose that the base year is 2000 and we want to calculate the real GDP for 2009. Which procedure would you use?

Multiply the quantities in 2009 by the prices in 2000, and add up the results.

is calculated as GDP minus the consumption of fixed capital, or depreciation.

National Income

The value of final goods and services evaluated at current-year prices.

Nominal GDP

In calculating GDP, which levels of government spending are included in government purchases?

spending by the federal, state, and local governments.

Which of the following is included in the economist's definition of investment?

the purchase of new machines, factories, or houses.

The Personal Income (PI) of the United States is equal to

the value of the total income received by all households int he United States. (national income minus retained corporate earnings plus government transfer payments and interest on government bonds.)

The market value a firm adds to a product

value added

The largest component of gross domestic income is

wages

An important conclusion to draw from the circular-flow diagram is that:

we can measure GDP by calculating the total value of expenditures on final goods and services, or by calculating the value of total income.

PART 1: Review the following events: 1. A farmer sells $300 worth of wheat to an agricultural products distributor. 2. The distributor trims, packages, and sells the wheat to a state-owned baker for $350. 3. The state-owned bakery uses all of the wheat to make bread and then sells it for $325. A. If for simplicity, we ignore the value of inputs used to grow the wheat-such as seeds, labor, and fertilizer, then the farmer's value added is $_____. B. The value added for the distributor is $_____. C. The value added for the state-owned bakery is $_____. PART 2: Would a state-owned firm that adds a negative value added to its products operate differently than a free market firm that adds negative value added to its products?

PART 1: A. $300 B. $50 C. $-25 PART 2: Yes. Under the circumstances, the private, free-market firm would quickly shut down, while the state-owned firm could continue operating, ceteris paribus.

Payments by the government to individuals for which the government does not receive a new good or service in return

Transfer payments examples???

True or False: Over a given time period, the sum of the value added by all firms is equal to a country's GDP.

True

What are the four categories of income?

Wages, interest, rent, and profit.

Which of the following are not part of "final goods," as used in the definition of GDP?

intermediate goods

Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP in the following situation: "In years after the base year, nominal GDP __________ real GDP." "In the base year, nominal GDP ____________ real GDP." "In years prior to the base year, nominal GDP ___________ real GDP."

is greater than is equal to; is less than

If we add up the value of every good and service produced in the economy, we get a total that is:

larger than GDP.

Shortcomings in GDP as a Measure of Total Production:

1. Household Production is unaccounted for 2. The Underground Economy -- Buying and selling of goods and services that is concealed form the government to avoid taxes or regulations or because the goods and services are illegal.

Shortcomings of GDP as a Measure of Well-Being:

1. The value of leisure is NOT included in GDP. 2. GDP is not adjusted for pollution or other negative effects of production. 3. GDP is not adjusted for changes in crime and other social problems. 4. GDP measures the size of the pie but not how the pie is divided up

GDP is a measurement of the market value of final goods and services produced in an economy in one year. What is the difference between a final good and an intermediate good? Why do we only count final goods in GDP and not intermediate goods?

A final good is one that is sold to the ultimate user of the product. It is not being purchased with the plan to transform the good and resell it. The alternative to a final good, and intermediate good, is purchased with the intent of using that good as a components in another good or service that is sold. Intermediate goods are inputs in a production process. Intermediate goods are excluded because the value of the final goods includes the value of the intermediate goods which are a component of the final good.

Indicate whether you agree or disagree with the following statement: "If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."

Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.

If Americans still worked 60 hour weeks, as they did in 1890,

GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher.

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.

Refers to goods and services people produce for themselves.

Household production

Indicate which component of GDO will be affect by each of the following transactions involving the Ford Motor Company. "Ford purchases new machine tools to use in its Missouri Escape factory." "The state of Missouri builds a new highway to help improve access to the Ford Escape plant." "Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China." "Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana." "You purchase a 2008 (preowned) Ford Escape Hybrid from a friend." "You purchase a new for Escape Hybrid from a Ford dealer.

Investment Expenditure; Government Expenditure; Net Export Expenditure; Not included in GDP calculation; Not included in GDP calculation; Consumption Expenditure

Which of the following is not a shortcomings of GDP as a measure of welfare?

It only counts final goods and services and not intermediate goods.

If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?

Larger: The value of all goods and services sold would include intermediate goods.

GDP is measured using ____________, not __________.

Market values, NOT quantities

A report of the World Bank includes the following statements: "Informal economic activities pose a particular measurement problem [in calculating GDP], especially in developing countries, where much economic activity may go unrecorded." PART 1: What does the World Bank mean by "informal economic activities"? PART 2: Why do these activities make it harder to measure GDP and, as a result, the standard of living?

PART 1: In many developing countries, informal economic activities refer to activities in the underground economy. PART 2: If a large portion of an economy's production is done in the underground economy, measured GDP will underestimate production and economic well-being.

is income received by households.

Personal Income

Which of the following is true about the government purchases component of U.S. GDP in 2008?

Purchases by state and local governments are greater than purchases by the federal government. ???

The value of final goods and services evaluated at base-year prices.

Real GDP

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

Real GDP uses the prices of goods and services int he base year to calculate the value of goods in all other years. By keeping prices constant,w e know that changes in real GDP represent changes in the quantity of output produced. Real GDP separates price changes from quantity changes.

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.

The flow of funds from _______________ into the financial system makes it possible for government and firms to borrow.

households

Which goods and services would be excluded from personal consumption expenditures in the Bureau of Economic Analysis (BEA) statistics?

a new house ???

Indicate whether the following is likely to increase or decrease the measured level of GDP. "When the number of people working outside the home decreases, the measured level of GDP __________." "When there is a sharp decrease in the crime rate, the measured level of GDP ________." "If higher tax rates cause more people to hide the income they earn, the measure GDP __________."

decreases; may increase or decrease; decreases

As the value of a country's GDP increases, the country is likely to

devote more resources to pollution reduction.

The best measure of the income households actually have available to spend is:

disposable personal income

Growth in the economy is almost always measured as

growth in real GDP.

In the circular-flow diagram, who supplies factors of production in exchange for income?

households