ECO 202: Exam 1
Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by the U.S. Bureau of Labor would equal...
(20/100) × 100.
Suppose an economy is given by: Population = 216 million Working-age Population = 147 million Labor force = 102 million The number of people employed = 93 million The number of people unemployed = 9 million The labor force participation rate for this economy is ________%.
(labor force/working-age population) x 100 (102,000,000/147,000,000) x 100 = .6938 x 100 69.4
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?
- it fails to account for illegal activities - it does not account for inaccurate responses to the Current Population Survey - discouraged workers are not considered unemployed - underemployed people are considered employed
Suppose booming economies in the BRIC nations (Brazil, Russia, India, and China) causes net exports (NX) to rise by $75 billion in the United States. If the MPC is 0.5, the change in equilibrium GDP will be $________ billion.
150 change in Y = [1/1-MPC] x (change in NX)
Using purchasing power parity exchange rates, which country has the largest GDP and which country has the second largest GDP? ________ has the largest GDP and ________ has the second largest GDP.
China ; United States
The price index which is used to measure changes in the cost of living is the...
Consumer Price Index (CPI)
What index is used to measure the average prices paid by a typical family? An average of the prices of the goods and services purchased by a typical family is the:
Consumer Price Index (CPI).
What are the four major components of expenditures in GDP?
Consumption, Investment, Government Purchases, Net Expenditures
Briefly explain whether you agree or disagree with the following statement: "I don't believe the government price statistics. The CPI for 2018 was 212, but I know that the inflation rate couldn't have been as high as 112 percent in 2018."
Disagree. The inflation rate is the percentage increase in the price level from the previous year, not the base year.
In 2018, the government of Venezuela raised the minimum wage by 5,900 percent, but an article in the Economist quoted one Venezuelan as saying that on his wages as a building worker, "you go a day and half a week without eating." He was able to buy far less with his higher wages than he had been able to buy with his wages a few years before. Why would the minimum wage in Venezuela buy so little despite having been raised by so much?
Even though their wages were increasing by 5,900 percent, prices were increasing by more.
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
Frictionally unemployed (short-term unemployment that arises from the process of matching workers with jobs)
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
Of the eight largest economies, which country has the most equal distribution of income and which country has the most unequal distribution of income? ________ has the most equal distribution of income and ________ has the most unequal distribution of income.
Germany ; Brazil
What index measures the degree of inequality in the distribution of family income in a country?
Gini index
GDP is an imperfect measure of economic well being because it fails to measure what types of production? Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being? a.) GDP is not adjusted for pollution and it does not account for unequal income distribution b.) the value of leisure is not included in GDP c.) GDP is not adjusted for crime or other social problems d.) all of the above e.) a and c only
Household production and the underground economy d.) all of the above
The president of a manufacturing firm that makes precision tools in California's Silicon Valley was quoted in an article in the Wall Street Journal as saying that "production workers... are scarce" and that "many applicants lack even the most rudimentary skills." He added that: "I would say in this valley, people looking for jobs are unemployed for a reason." Are these applicants likely to be cyclically, frictionally, or structurally unemployed, and what would be the reason that most of them are unemployed? Briefly explain.
Structurally unemployed, because these applicants lack the skills required for the available jobs.
Suppose the economy's consumer price index (CPI) in 2008 was 185 and the CPI in 2009 was 196. The inflation rate over the period from 2008-2009 was equal to ________%
The inflation rate is equal to the percentage change in the CPI computed by: ((New CPI value - Initial CPI value)/Initial CPI value) x 100 ((196-185)/185) x 100 = (11/185) x 100 5.9%
Of the eight largest economies in terms of GDP using purchasing power parity exchange rates, which country has the highest GDP per capita and which country has the lowest? ________ has the highest GDP per capita and ________ has the lowest GDP per capita.
United States ; India
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 quantity.
What is the equation that represents the relationship between GDP and the four major expenditure components?
Y = C + I + G + NX
Year: 2008; Nominal Average Hourly Earnings: $16.00; CPI: 202 Year: 2009; Nominal Average Hourly Earnings: $17.00; CPI: 207 Year: 2010; Nominal Average Hourly Earnings: $18.00; CPI: 209 a.) What is the real average hourly wage in 2009? b.) What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and 2010?
a.) (17/207)x100 = $8.21 b.) both real and nominal average hourly earnings increased.
a.) Suppose the interest rate on your car loan is 15.00 percent and the inflation rate is 14.00 percent. Calculate the real interest rate. b.) Suppose the interest rate on your car loan is 5.00 percent and the inflation rate is 2.00 percent. Calculate the real interest rate. c.) Situation 1 will be ________ than situation 2 because the ________ is lower. d.) JPMorgan Chase would prefer ________.
a.) 15-14= 1% b.) 5-2= 3% c.) better than; real interest rate d.) Situation 2
a.) What are the four main determinants of investment? b.) How would an increase in interest rates affect investment?
a.) expectations of future profitability, interest rates, taxes, cash flow. b.) real investment spending declines
Assuming the inflation has occurred over time, what is the relationship between nominal GDP and real GDP in each of the following situations? a.) in years after the base yer, nominal GDP ________ real GDP. b.) in the base year, nominal GDP ________ real GDP. c.) in the years prior to the base yer, nominal GDP ________ real GDP.
a.) is greater than b.) is equal to c.) is less than
During the spring of 2015, the United Kingdom experienced a brief period of deflation. According to an article in the Wall Street Journal, "The U.K.'s history of sticky and hard-to-control inflation suggests that a short period of falling prices will be taken as a reprieve for consumers, not as a signal to defer purchases." a.) Consumers could see deflation as a "signal to defer purchases" because if deflation is expected to continue... b.) Lower prices usually cause consumers to buy more, not less. However, in this case, consumers may...
a.) prices would be lower in the future. b.) delay buying until prices fall further, so current lower prices would not have the unusual effect.
a.) On the 45-degree line diagram (or Keynesian Cross) the horizontal axis measures ________, while the vertical axis measures ________. b.) The aggregate expenditures line will be... c.) The macroeconomic equilibrium will be...
a.) real GDP; real aggregate expenditure b.) upward sloping with a flatter slope than the 45-degree line c.) where the AE line intersects with the 45-degree line
A Federal Reserve publication notes that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions." a.) "Shedding of unwanted inventories" means that firms are... b.) Inventories are unwanted when... c.) Shedding inventories would lead to a decline in GDP because...
a.) selling their unplanned increases in inventories from previous time periods. b.) expenditures are too low to keep pace with inventories. c.) current production will decrease as inventories are "shed", which reduces GDP.
Which one of the following depicts an accurate description of the household survey and the establishment survey? a.) the household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measure total unemployment in the economy b.) the household survey interviews households and measures the employment rate whereas the establishment survey interviews self-employed people and measures unemployment rate c.) the household survey conducts surveys of small companies and measures the employment and the unemployment rate whereas the establishment survey interviews big establishments and measure the unemployment rate d.) the household survey interviews retired individuals and measures the unemployment rate whereas the establishment survey interviews working population and measures the employment rate
a.) the household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measure total unemployment in the economy
An MPC equal to 0 implies a multiplier of 1, meaning that a $1 increase in autonomous expenditures would increase real GDP by only $1. a.) Why does an MPC of 0 result in no multiplier effect? Explain your answer using the logic of the multiplier process. Conversely, and MPC equal to 1 implies an infinite multiplier, meaning that a $1 increase in autonomous expenditures would increase real GDP by an infinite amount. b.) Why does an MPC of 1 result in an infinite multiplier? Explain your answer using the logic of the multiplier process.
a.) when the MPC is 0, any additional income does not induce any additional consumption spending. b.) an MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
A decrease in the interest rate would cause the...
aggregate expenditure line to shift upward, increasing equilibrium real GDP.
In the 45-degree line diagram, the 45-degree line shows...
all the points where aggregate expenditure equals real GDP.
Which of the following will raise consumer expenditures?
an increase in expected future income.
Which of the following would shift the aggregate expenditure line upward?
an increase in foreign real GDP.
Which of the following is included in the economist's definition of investment? a.) the purchase of a share of stock b.) the purchase of new machines, factories, or houses c.) the purchase of a rare coin or a deposit in a savings account d.) all of the above
b.) the purchase of new machines, factories, or houses
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 ________ the cost of the market basket.
change; overestimates
An article in the Wall Street Journal notes that "raising productivity in the long run is the most effective way to elevate standards of living." The claim of this article is...
consistent with the economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck mechanic?
cyclically unemployed (caused by a business cycle recession)
How does real GDP deal with the problem inflation causes with nominal GDP? a.) real GDP uses the prices of goods and services in the base year to calculate the value of good in all other years b.) real GDP separates price changes from quantity changes c.) by keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced. d.) all of the above e.) a and c only
d.) all of the above
The multiplier effect is the process by which: a.) an increase in aggregate expenditure leads to an increase in inflation. b.) an increase in real GDP leads to a larger increase in autonomous expenditure. c.) an increase in real GDP or income leads to an increase consumption. d.) an increase in autonomous expenditure leads to a larger increase in real GDP.
d.) an increase in autonomous expenditure leads to a larger increase in real GDP.
When an unemployed person drops out of the labor force, it...
does not affect the employment-population ratio
During the late nineteenth century in the United States, many farmers borrowed heavily to buy land. During most of the period between 1870 and the mid-1890s, the United States experienced mild deflation. Many farmers engaged in political protests during these years, and deflation was often a subject of their protests. Why would farmers have felt burdened by deflation during this period?
during deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.
Many economists prefer the ________ survey. Why?
establishment because it is determines by actual payroll records rather than unverified answers
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 someones income
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will ________.
fall; increase
Government unemployment insurance tends to...
increase the unemployment rate by lowering the opportunity cost of job search.
What is 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.
The unemployment rate that includes discouraged workers and people working part-time who would prefer full-time jobs
is higher than the official unemployment rate, and the difference between the two grows larger in recessions
The unemployment rate equals the number of unemployed divided by the ________, all times 100.
labor force
_________ is the percentage of the working-age population in the labor force.
labor force participation rate
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation?
lenders lose from a lower real interest rate and borrowers gain from a lower real interest rate
When the economy is at full employment, unemployment is equal to...
natural rate of unemployment
The difference between a nominal variable and a real variable is that...
nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.
Discouraged workers are classified by the BLS as...
not in the labor force
Someone who is available for work but has not actively looked for work in the previous four weeks would be classified as...
not in the labor force
The payment of government unemployment insurance reduces the severity of recessions by...
preventing a huge drop in income and spending for the unemployed.
As of 2019, 19 countries in Europe had adopted the euro as their common currency. These countries are called the euro zone. According to an article in the Wall Street Journal, "The European Union's statistics agency said the combined GDP of the eurozone's 19 members increased by an annualized 1.5% in the three months through March." Is it likely that the article is referring to the growth in nominal GDP or the growth in real GDP? Briefly explain.
real GDP, because it shows how the economy's overall production of goods and services changes over time
The unemployment rate...
rises during recessions, falls during expansions, and is always below zero.
A consumer price index of 160 in 1996 with a base year of 1982 - 1984 would mean that the cost of the market basket...
rose 60% from the cost of the market basket in the base year
In calculating GDP, which levels of government spending are included in government purchases?
spending by federal, state, and local governments
What is the key idea in the aggregate expenditure macroeconomic model?
that in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
Which of the following does the aggregate expenditure macroeconomic model seek to explain?
the business cycle
Gross Domestic Product (GDP) is...
the market value of all final goods and services produced in a country during a period of time
The difference between the nominal interest rate and the real interest rate is...
the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.
If the economy is experiencing deflation...
the nominal interest rate will be lower than the real interest rate
If inflation is expected to increase...
the nominal interest rate will increase.
The employment-population ratio measures the...
the percentage of the working-age population that is employed
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 economics student raises the following objection: "The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following?
the student is confusing saving with investment.
The natural rate of unemployment is...
the sum of structural unemployment and frictional unemplyment
Macroeconomic equilibrium occurs where...
total spending, or aggregate expenditure, equals total production, or GDP.
When an unemployed person drops out of the labor force, the unemployment rate...
understates the true degree of joblessness in the economy.
If the inflation rate is 6 percent and the nominal interest rate is 4 percent, then the real interest rate is...
-2 percent - which is the nominal interest rate minus the inflation rate.
