ECO2013-Tucker-Exam Two

NDP=

GDP- capital consumption allowance

Personal consumption expenditures (C):

Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services.

Inflation:

A measure of changes in the cost of living. A general rise in prices throughout the economy.

If the pound sterling appreciates against the U.S. dollar, England buys ______ U.S. goods, causing the U.S. aggregate demand curve to shift to the ______. a.) more; right b.) more; left c.) fewer; left d.) fewer; right

a.) more; right

Q: What does gross national product measure, and how does it differ from GDP?

A: Gross national product (GNP) measures the market value of all goods and services produced by resources supplied by U.S. residents. GNP includes goods produced here and abroad, as long as the production involves resources owned by U.S. residents. The difference between GDP and GNP is small.

Q: What are the main categories in the expenditures approach for measuring GDP?

A: Measuring GDP with the expenditures approach means all spending on final goods and services is added together. The four major categories of spending are personal consumer spending, gross private domestic investment, government spending, and net exports (exports minus imports).

Q: What is the Leading Economic Index (LEI)?

A: The Leading Economic Index is a weighted index of ten leading indicators. It includes indicators like manufacturers' orders and stock prices, which tend to change prior to changes in the overall economy. A change in the LEI today predicts how the economy will change tomorrow.

Q: What is the equation for GDP using the expenditures approach?

A: The four spending categories are commonly abbreviated as C (consumption), I (investment), G (government), and X-M (exports minus imports, or net exports). Together, these four variables constitute GDP: GDP =C + I + G + (X -M).

What is the difference between gross private domestic investment and net private domestic investment?

Gross private domestic investment less depreciation is net private domestic investment.

Suppose inventories declined by $1 billion during 2001. How would this affect the size of gross private domestic investment and gross domestic product in 2001? Explain.

If inventories declined by $1 billion in 2001, $1 billion would be subtracted from both gross private domestic investment and gross domestic product. A decline in inventories indicates that goods produced in a previous year have been used up in this year's production. If $1 billion is not subtracted as stated, then $1 billion of goods produced in a previous year would be counted as having been produced in 2001, leading to an overstatement of 2001's production.

Informal economy:

Includes all transactions that are conducted but are not licensed and/or generate income that is not reported to the government (for tax collection).

NI=

NDP+ Net FOREIGN income abroad

(Key Question) Why do national income accountants include only final goods in measuring GDP for a particular year?

The dollar value of final goods includes the dollar value of intermediate goods. If intermediate goods were counted, then multiple counting would occur. The value of steel (intermediate good) used in autos is included in the price of the auto (the final product).

Depreciation

The value of all the physical capital—machines, equipment, buildings—used up in producing the year's output.

Which of the following may be an explanation for the shift in aggregate demand from A to B? a.) Prices fall and increase real wealth. b.) Consumer confidence drops and consumption spending falls. c.) Goods and services become less competitive and exports fall. d.) Interest rates fall and boost investment.

d.) Interest rates fall and boost investment.

(T / F) Unemployment generally increases during recessions.

True

Is the income of a dentist included in the GDP?

Yes, it is a payment for a final service.

Is the interest received on corporate bonds part of GDP?

Yes, the income received by the bondholders is paid by the corporations for the current use of the "money capital" (the loan).

Is a $2 billion increase in business inventories included in GDP?

Yes, the increase in inventories could only occur as a result of increased production.

Is the rent received on a two-bedroom apartment included in GDP?

Yes, this is a payment for the final service of housing.

If the current year's consumer price index is 214 and last year's was 209, then the rate of inflation is: a.) 2.4%. b.) 5%. c.) 3%. d.) 2.8%.

a.) 2.4%. (5/209= .0239)

Which of the following is the best description of the National Activity Index? a.) a weighted average of 85 indicators of national economic activity b.) an index that uses ten important leading indicators to produce a weighted index c.) an index that shows the interest rates for bonds with different maturity rates d.) an index that measures the total production of all active businesses in the economy

a.) a weighted average of 85 indicators of national economic activity

Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% in the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2%: a.) creditors gain at debtors' expense. b.) people on a fixed income see the purchasing power of their incomes rising. c.) debtors gain at creditors' expense. d.) there's a redistribution of income from creditors to debtors.

a.) creditors gain at debtors' expense.

Simon Kuznets: a.) devised the gross national product as a way of measuring a nation's economic output. b.) set up the National Bureau of Economic Research. c.) was Secretary of Treasury during World War II. d.) invented the hair net.

a.) devised the gross national product as a way of measuring a nation's economic output.

The four types of spending in GDP are personal consumer spending, ___________ private domestic investment, government spending, and _______. a.) gross; net exports b.) gross; net imports c.) net; net exports d.) net; net imports

a.) gross; net exports

If actual unemployment is at its natural rate: a.) inflation is very low. b.) there is deflation. c.) the unemployment rate is zero. d.) interest rates are rising.

a.) inflation is very low.

A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded. a.) left; decrease b.) left; increase c.) right; increase d.) right; decrease

a.) left; decrease

What event was a major influence on the development of macroeconomics? a.) the Great Depression b.) the Employment Act of 1946 c.) the establishment of the Federal Reserve System in the United States d.) the U.S. entry into World War II

a.) the Great Depression

Which of the following illustrates the paradox of thrift? a.) Consumer uncertainty causes people to save less; consumption rises; equilibrium income and production drop; savings drop because income is lower. b.) Consumer uncertainty causes people to save more; consumption drops; equilibrium income and production drop; savings drop because income is lower. c.) The government encourages saving by raising interest rates; higher interest rates reduce investment spending, which lower equilibrium income and production drop; savings drop because income is lower. d.) As businesses save more, interest rates fall, thus reducing household savings.

b.) Consumer uncertainty causes people to save more; consumption drops; equilibrium income and production drop; savings drop because income is lower.

When Mr. Wilson worked full time, he paid a cleaning service to have his house cleaned twice a month. Now that he is retired, Mr. Wilson does his own cleaning. What is the effect on GDP? a.) GDP is unaffected by this change. b.) GDP falls as a result of this change. c.) GDP at first rises but then falls. d.) GDP rises as a result of this change.

b.) GDP falls as a result of this change.

_____ is the change in consumption associated with a change in income. a.) The average propensity to consume b.) The marginal propensity to consume c.) The average propensity to save d.) The marginal propensity to save

b.) The marginal propensity to consume

9. Which one of the following is not correct regarding business cycles? a.) They occur periodically. b.) They are fairly uniform in length. c.) They have peaks and troughs. d.) They show that macroeconomic activity alternates between increases and decreases.

b.) They are fairly uniform in length.

Which of the following will NOT shift the aggregate supply curve to the left? a.) an increase in the minimum wage b.) a decrease in corporate taxes c.) an increase in the price of crude oil d.) an increase in the legislated amount of paid vacation

b.) a decrease in corporate taxes

After the acceptance of Keynesian analysis, government: a.) played a role in setting the interest rate only. b.) actions toward macroeconomic policy grew significantly. c.) reduced its role in the operation of the economy. d.) turned to communism as the only solution to the Great Depression.

b.) actions toward macroeconomic policy grew significantly.

A rising aggregate price level _______ an economy's interest rates and therefore _____ output demanded. a.) increases; increases b.) increases; reduces c.) reduces; increases d.) reduces; reduces

b.) increases; reduces

The value of the cars that the Ford Motor Company produces in a German plant: a.) is a part of U.S. GDP. b.) is a part of U.S. GNP. c.) is a part of German GNP. d.) is not a part of German GDP.

b.) is a part of U.S. GNP.

If AE = $7,600 and Y = $8,000, businesses will produce: a.) more, raising both employment and income. b.) less, lowering both employment and income. c.) more, raising employment and lowering income. d.) less, lowering employment and raising income.

b.) less, lowering both employment and income.

The short-run aggregate supply curve is positively sloped because: a.) a short-run increase in GDP usually is accompanied by an increased rise in the price level. b.) many input prices are slow to change in the short run. c.) all variables are fixed in the short run. d.) a short-run increase in GDP usually is accompanied by a slower rise in the price level.

b.) many input prices are slow to change in the short run.

Which is a determinant of aggregate supply? a.) interest rates b.) productivity c.) prices of substitutes d.) household expectations

b.) productivity

High taxes and/or heavy regulation: a.) can cause firms to boost production so they can cover the added costs. b.) raise costs of production so that the aggregate supply curve shifts to the left. c.) are not likely to affect firms' behavior, since they are more concerned about profit than taxes or regulation . d.) are likely to shift aggregate supply to the right.

b.) raise costs of production so that the aggregate supply curve shifts to the left.

Which phase of the business cycle typically follows immediately after the trough? a.) recession b.) recovery c.) peak d.) contraction

b.) recovery

GDP can be found either by adding up all of the __________ or all of the __________ in the economy. a.) spending; taxes b.) spending; income c.) investment; income d.) net interest payments; taxes

b.) spending; income

Which organization determines the beginning and end dates of a recession? a.) the Council of Economic Advisers b.) the National Bureau of Economic Research c.) the U.S. Treasury Department d.) the Federal Reserve Board of Governors

b.) the National Bureau of Economic Research

Which of the following tends to make aggregate demand decrease by more than the amount that consumer spending decreases? a.) crowding-out b.) the multiplier effect c.) the wealth effect d.) the interest rate effect

b.) the multiplier effect

Which one of the following statements concerning GDP is not correct? a. It can be found by adding up all of the spending in the economy. b. It can be found by adding up all of the income in the economy. c. It incorporates environmental benefits or harm. d. It overstates sustainable output because it does not subtract depreciation.

c. It incorporates environmental benefits or harm.

Which of the following purchases would not be included in GDP? a. a $30 oil change from a car mechanic b. a $50 carpet stain removal from a cleaning service company c. a $20 lamp from a garage sale d. a $10 lunch from a cafeteria

c. a $20 lamp from a garage sale

GDP Expenditures for 2010 Expenditure Billions Personal consumption $10,353.5 Gross private domestic investment 1,769.1 Exports 1,746.1 Imports 2,251.5 Government purchases 2,975.1 Capital consumption allowance 1,030.2 According to the table, GDP for 2010 was: a.) $15,603.1 billion. b.) $16,843.8 billion. c.) $14,592.3 billion. d.) $13,562.1 billion.

c.) $14,592.3 billion.

If $1,000 of additional spending occurs (from investment, say) and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output. a.) $800 b.) $1,000 c.) $5,000 d.) $8,000

c.) $5,000 (1 / (1 - 0.8)) * $1,000 = $5,000

(2014: Nominal GDP= $8511 billion, & GDP deflator= 112.7) According to the table, real GDP for 2014 is approximately: a.) $6,552 billion. b.) $7,052 billion. c.) $7,552 billion. d.) $8,052 billion.

c.) $7,552 billion. (8511/1.127= 7,552)

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase? a.) $11,000 b.) $1,000 c.) $900 d.) $100

c.) $900

If nominal GDP in 2014 is $20,000 billion while real GDP is $16,000 billion, then the GDP deflator in 2014 is: a.) 80. b.) 110. c.) 125. d.) 150.

c.) 125. (20,000/16,000= 1.25)

Which one of the following statements about NIPA is not correct? a.) It helps economists compare U.S. income and output to that of other nations. b.) It tracks the economy's progress over the course of the business cycle. c.) It is put together by the National Bureau of Economic Research. d.) It began in the 1930s

c.) It is put together by the National Bureau of Economic Research.

Which of the following persons is considered to be unemployed? a.) Ahmed, who is on vacation b.) Sarah, who is on strike duty c.) Tiffany, who is going on interviews, hoping to get her first job d.) Carmen, who works three days a week at her father's business but is not paid

c.) Tiffany, who is going on interviews, hoping to get her first job

Simultaneous recession and deflation can be explained by: a.) an increase in aggregate supply. b.) a rise in aggregate demand. c.) a drop in aggregate demand. d.) a decrease in aggregate supply.

c.) a drop in aggregate demand.

The idea that all income ultimately goes to households, which then use it to buy goods and services from firms, is a central idea of the: a.) production possibilities frontier. b.) supply and demand model. c.) circular flow diagram. d.) classical model.

c.) circular flow diagram.

If the cost of a typical market basket in 2019 is 400 and the cost of a typical market basket in 2020 is 390, then during this period the economy is undergoing: a.) inflation. b.) disinflation. c.) deflation. d.) hyperinflation.

c.) deflation.

Workers who want to work but have been frustrated by the inability to find work and have stopped searching are known as: a.) the invisible unemployed. b.) temporary workers. c.) discouraged workers. d.) the disgruntled unemployed.

c.) discouraged workers.

Core inflation is found by removing _________ from the consumer price index. a.) housing b.) medical care c.) food and energy d.) producer prices

c.) food and energy

The GDP deflator is an index that includes prices of all but: a.) consumer goods. b.) investment goods. c.) imports. d.) government goods and services.

c.) imports.

The shift in aggregate demand depicted (to the left) may be due to a(n): a.) increase in consumer confidence. b.) decrease in interest rates. c.) increase in income taxes. d.) increase in exports.

c.) increase in income taxes.

The twin perils of the modern macroeconomy are said to be: a.) government and the trade deficit. b.) unemployment and the trade surplus. c.) inflation and unemployment. d.) inflation and the trade deficit.

c.) inflation and unemployment.

8. Which of the following is NOT included as an indicator in the Leading Economic Index? a.) stock prices b.) money supply, M2 c.) net exports d.) index of consumer expectations

c.) net exports

Which of the following is NOT included in gross private domestic investment? a.) construction of residential housing b.) new equipment purchased by businesses c.) purchases of common stock by investors d.) an increase in business inventories

c.) purchases of common stock by investors

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded. a.) left; decrease b.) left; increase c.) right; increase d.) right; decrease

c.) right; increase

If oil prices decrease, the short-run aggregate supply curve shifts _____ and output supplied will be _____. a.) left; increased b.) left; reduced c.) right; increased d.) right; reduced

c.) right; increased

At point A: a.) saving is $20. b.) consumption is zero. c.) saving is zero. d.) consumption exceeds income by $20.

c.) saving is zero.

Macroeconomics studies: a. the most important factors in determining economic growth. b. the causes of employment and unemployment. c. economic activity from a broad perspective. d. All of the above.

d. All of the above.

Median household income in the United States was about $55,000 in 2013. This indicates that in 2013: a. GDP divided by the number households equaled $55,000. b. About half of all households had an income equal to $55,000. c. All households with an income below $55,000 were officially poor. d. Half of all households had an income above $55,000, and half of all households had an income below $55,000.

d. Half of all households had an income above $55,000, and half of all households had an income below $55,000.

Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is: a.) $0.2 trillion. b.) $0.05 trillion. c.) -$0.2 trillion. d.) $0.1 trillion.

d.) $0.1 trillion.

If your salary was $50,000 last year and this year you receive a cost-of-living increase tied to the consumer price index (CPI), what will your salary be, assuming the CPI has risen from 110 to 114? a.) $49,114 b.) $50,114 c.) $50,300 d.) $51,818

d.) $51,818 (4/110= .0363), (.0363*50,000= 1,818) (1,818+50,000= 51,818)

If the marginal propensity to consume is 0.85, how much is the spending multiplier? a.) 0.15 b.) 1.17 c.) 5.1 d.) 6.67

d.) 6.67 (1/(1 - 0.85))

The 45-degree line in the Keynesian model represents: a.) AE = C. b.) AE = G. c.) AE = I. d.) AE = Y.

d.) AE = Y.

Q: How are business cycles defined?

A: Business cycles contain four phases: the peak or boom, followed by a recession or downturn, leading to the trough or the low point of the cycle, followed by a recovery, leading to another peak. Business cycles vary dramatically in duration and intensity. Figure 1 is a model of a business cycle.

Q: What is gross domestic product (GDP)?

A: Gross domestic product (GDP) is the standard measure the Commerce Department uses to gauge the economy's output. It is equal to the total market value of all final goods and services produced by resources located in the United States in a given year.

Which one of the following is not an aspect of business cycles? a.) They vary in length and intensity. b.) The National Bureau of Economic Research (NBER) officially dates the "turning points" in the business cycle. c.) They chart the way aggregate economic activity fluctuates between increases and decreases. d.) They show how the macroeconomy winds up exactly where it started from, again and again throughout the past century

d.) They show how the macroeconomy winds up exactly where it started from, again and again throughout the past century

What would cause the price level to decrease and employment to increase? a.) a shift to the left of the AD curve b.) a shift to the right of the AD curve c.) a shift to the left of the SRAS curve d.) a shift to the right of the SRAS curve

d.) a shift to the right of the SRAS curve

If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income: a.) increases by $10 billion. b.) increases by $2.5 billion. c.) decreases by $5 billion. d.) decreases by $10 billion.

d.) decreases by $10 billion. (2* (-$5 billion)= - $10 billion)

Arlina got a 5% raise while the rate of inflation was 6%. Arlina's standard of living: a.) rose by about 1%. b.) rose by about 2%. c.) fell by about 3%. d.) fell by about 1%.

d.) fell by about 1%.

Which of the following items is NOT included in the GDP deflator? a.) bubble gum b.) turbines c.) fire engines d.) imported mangoes

d.) imported mangoes

Which one of the following would NOT lead to higher prices? a.) strong consumer demand b.) higher gas prices c.) an increase in the supply of money d.) increases in the supply of food

d.) increases in the supply of food

We are most likely to see a recession if interest rates on long-term bonds are: a.) higher than interest rates on short-term bonds. b.) the same as interest rates on short-term bonds. c.) rising. d.) lower than interest rates on short-term bonds.

d.) lower than interest rates on short-term bonds.

Full employment: a.) is an unemployment rate of zero. b.) consists of frictional and cyclical unemployment. c.) consists of structural and cyclical unemployment. d.) occurs if cyclical unemployment is zero.

d.) occurs if cyclical unemployment is zero.

If a product becomes obsolete and the workers who produced that product will need additional training to find new jobs, then they are experiencing: a.) frictional unemployment. b.) cyclical unemployment. c.) full unemployment. d.) structural unemployment.

d.) structural unemployment.

If a government always balances its budget: a.) the economy can never slide into a recession. b.) raising taxes has no net effect on total spending. c.) economic growth is spurred by showing businesses that budgets can be balanced. d.) the effect of an increase in government spending on aggregate expenditures is weakened.

d.) the effect of an increase in government spending on aggregate expenditures is weakened.

An economy has historically grown at a rate of 1.25%. Economic activity decreased every quarter over the past year, but the decline stopped this quarter. The economy is expected to grow at a rate of 1.4% in the near future, and the monetary authorities are concerned that inflation may increase. This economy is probably in the _____________ stage of the business cycle. a.) expansion b.) recovery c.) contraction d.) trough

d.) trough

Disposable personal income:

Personal income minus (personal) taxes.

_____ is a reduction in the rate of inflation. a.) Disinflation b.) Deflation c.) Hyperinflation d.) The price level

a.) Disinflation

The largest component of GDP is: a.) consumption expenditure. b.) gross private domestic investment. c.) government spending. d.) net exports.

a.) consumption expenditure.

A business cycle is: a.) the periodic fluctuation of economic activity. b.) the engine of economic growth. c.) a period lasting about 50 years. d.) identical to the consumption life cycle.

a.) the periodic fluctuation of economic activity.

10. What is the low point of a business cycle? a.) recession b.) depression c.) contraction d.) trough

d.) trough

Price index=

(price / price of the base year) *100

Discuss the conceptual issues or measurement problems of Gross domestic product (GDP) (3 specific ones)

1.) GDP is a MARKET value/ monetary measure (There is no market/$ value on personal productive work (housewife example). There must be a market value assigned to the service) 2.) Only FINAL goods and services are counted (you don't want to count the intermediate pieces' values twice, so you wait until the good is finalized to consider the value of the good in its entirety) 3.) Nonproductive transactions are excluded ( - public transfer, private transfer, buying or selling financial securities (stocks/bonds) - secondhand sales)

GDP per capita:

A country's GDP divided by its population. GDP per capita provides a useful measure of a country's relative standard of living.

Gross domestic product (GDP):

A measure of the economy's total output; it is the most widely reported value in the national income and product accounts (NIPA) and is equal to the total market value of all final goods and services produced by resources in the United States in a given year.

Double-dip recession:

A recession that begins after only a short period of economic recovery from the previous recession.

Q: Why are national income and product accounts valuable?

A: The national income and product accounts (NIPA) allow economists to judge our nation's economic performance, compare American income and output to that of other nations, and track the economy's condition over the course of the business cycle.

National income:

All income, including wages, salaries and benefits, profits (for sole proprietors, partnerships, and corporations), rental income, and interest.

Personal income:

All income, including wages, salaries, and other labor income; proprietors' income; rental income; personal interest and dividend income; and transfer payments (welfare and Social Security payments) received, with personal contributions for social insurance subtracted out.

Business cycles:

Alternating increases and decreases in economic activity that are typically punctuated by periods of downturn, recession, recovery, and boom.

(T / F) The official dates of the business cycle are determined by the Bureau of Economic Analysis.

False (The National Bureau of Economic Research (NBER) officially dates the "turning points" in the business cycle.)

Net domestic product:

Gross domestic product minus depreciation, or the capital consumption allowance.

Government spending:

Includes the wages and salaries of government employees (federal, state, and local); the purchase of products and services from private businesses and the rest of the world; and government purchases of new structures, equipment, and software

PI=

NI - (ind. bus. tax + SS tax + corp tax + undistributed corp profits) + transfer payments NI - (Industry business taxes + Social Security taxes + Corporate taxes + undistributed corporate profits) + transfer payments

Define net exports.

Net exports are a country's exports of goods and services less its imports of goods and services.

Is the money received by Smith when she sells her economics textbook to a book buyer included in GDP?

No, secondhand sales are not counted; the textbook is counted only when sold for the first time.

Is a 2-hour decline in the length of the workweek included in the GDP?

No, the effect of the decline will be counted, but the change in the work week itself is not the production of a final good or service or a payment for work done.

Real GDP=

Nominal GDP/ price index (decimal)

If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appropriate: gross private domestic investment OR net private domestic investment? Explain.

Since net domestic product is gross domestic product less depreciation, in determining net domestic product through the expenditures approach it would be appropriate to use the net investment measure that excludes depreciation, that is: net private domestic investment.

Explain how the United States' exports and imports each affect domestic production.

The United States' exports are as much a part of the nation's production as are the expenditures of its own consumers on goods and services made in the United States. Therefore, the United States' exports must be counted as part of GDP. On the other hand, imports, being produced in foreign countries, are part of those countries' GDPs. When Americans buy imports, these expenditures must be subtracted from the United States' GDP, for these expenditures are not made on the United States' production.

Price level:

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).

(Key Question) Why don't the NIA include the value of stocks and bonds sold in GDP?

This value is not included in GDP because such sales and purchases simply transfer the ownership of existing assets; such sales and purchases are not themselves (economic) investment and thus should not be counted as production of final goods and services.

(Key Question) Why don't the NIA include the value of used furniture bought and sold in GDP?

Used furniture was produced in some previous year; it was counted as GDP then. Its resale does not measure new production.

Effects of interest rates on investment curves (Ch. 8 HW graphing problem)

When the interest rate increases, there is an upward movement along the investment curve. As businesses become more optimistic about the future and expect an increase in sales, they will invest more in the current period for every rate of interest. As a result, the investment curve shifts to the right to I2. If, however, businesses become more pessimistic about the future, they will cut back on investment spending and consequently, the investment curve shifts to the left to I3.

Effects of interest rate changes on the expenditure/investment equilibrium (Ch. 8 HW graphing problem)

With the economy at equilibrium at point E0, an increase in interest rates would decrease both consumer expenditures (C) and investment (I). This would cause the current aggregate expenditure curve (AE0) to shift down for every price level to AE1. Since the MPC has not changed, the slope of the AE line does not change, leading to a parallel shift. The new equilibrium at point E1 occurs at a lower level of aggregate expenditures and income. To show this on the graph, draw a positively sloped line to the right and parallel to AE0. Label this curve "AE1." Use the double drop line tool to mark the intersection of AE1 and Y = AE.

Is the interest on an AT&T bond included in the GDP?

Yes It is included as income received by the bondholder for the services derived by the corporation for the loan of money.

Is the purchase of an insurance policy included in the GDP?

Yes, insurance is a final service. If bought by a household, it will be shown as consumption; if bought by a business, as investment—as a cost added to its real investment in physical capital.

(2013: Real GDP in $billions= $5,865 & GDP deflator= 86.1) According to the table, nominal GDP for 2013 is approximately: a.) $5,050 billion. b.) $5,250 billion. c.) $5,450 billion. d.) $5,650 billion.

a.) $5,050 billion. (5,865*.861= 5,050)

The long-run aggregate supply curve uses the classical assumptions that all variables are __________ in the long run and that long-run equilibrium occurs at ___________________. a.) flexible; full employment b.) flexible; less than full employment c.) fixed; less than full employment d.) fixed; full employment

a.) flexible; full employment

If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume? a.) 0.4 b.) 0.6 c.) 1.2 d.) 2.5

b.) 0.6

The slope of the saving schedule is: a.) the marginal propensity to consume. b.) 1 minus the marginal propensity to consume. c.) the average propensity to consume. d.) the average propensity to save.

b.) 1 minus the marginal propensity to consume.

Which of the following equations defines the expenditures approach to calculating GDP? a.) GDP = C + S b.) GDP = C + I + G + (X - M) c.) GDP = C + I + G + S d.) GDP = C + I + G

b.) GDP = C + I + G + (X - M)

(Figure: Determining SRAS Shifts) If there are advances in technology, the short-run aggregate supply curve will shift from SRAS0 to _____ and the price level will become _____. a.) SRAS1; P0 b.) SRAS1; P1 c.) SRAS2; P1 d.) SRAS2; P2

b.) SRAS1; P1

(Figure: Predicting Aggregate Demand Shifts) Which of the following would shift the aggregate demand curve from AD2 to AD1(to the left)? a.) a tax cut b.) an increase in interest rates c.) an increase in government purchases d.) an improvement of consumer expectations about the future

b.) an increase in interest rates

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____. a.) disposable income; saving b.) disposable income; consumption c.) saving; consumption d.) saving; investment

b.) disposable income; consumption

U.S. business cycles since 1950 have shown: a.) expansions to be just as lengthy as recessions. b.) expansions to be longer than recessions. c.) expansions to be shorter than recessions. d.) stable unemployment rates.

b.) expansions to be longer than recessions.

The U.S. gross domestic product is equal to the total market value of all: a.) intermediate goods and services produced by resources in the United States. b.) final goods and services produced by resources in the United States. c.) final goods and services produced by U.S. citizens in the United States. d.) intermediate goods and services produced by U.S. citizens in the United States.

b.) final goods and services produced by resources in the United States.

In the Keynesian model, the principal determinant of saving is: a.) interest rates. b.) income. c.) tax rates. d.) investment.

b.) income.

The U.S. median household income in 2013 was about: a.) $20,000. b.) $35,000. c.) $55,000. d.) $85,000.

c.) $55,000.

Firms decide how much to invest by comparing the rate of return on their projects with: a.) their total profit. b.)the productivity of the workers assigned to the projects. c.) the interest rate. d.) before-tax rate of return.

c.) the interest rate.

Cost-push inflation is a situation in which: a.) the short-run aggregate supply curve shifts rightward. b.) the aggregate demand curve shifts rightward. c.) the short-run aggregate supply curve shifts leftward. d.) the aggregate demand curve shifts leftward.

c.) the short-run aggregate supply curve shifts leftward.

Which of the following items would be included in the GDP accounts? a.) personal time spent learning how to use accounting software b.) personally rotating the tires on your neighbor's car c.) caring for your aged grandmother at home d.) $50 consultation on the phone with a psychic adviser

d.) $50 consultation on the phone with a psychic adviser

4 phases of a business cycle

1. Peak 2. Recession (downturn) 3. Trough 4. Recovery

GDP=

C+Ig+G+(X-M) personal (C)onsumption + (g)ross private domestic (I)nvestment + (G)overnment purchases of goods & services + net exports (total exports- total imports)

Explain why an economy's output is also its income?

Everything that is produced is sold, even if the "selling," in the case of inventory, is to the producing firm itself. Since the same amount of money paid out by the buyers of the economy's output is received by the sellers as income (looking only at a private-sector economy at this point), "an economy's output is also its income."

Suppose foreigners spend $7 billion on American exports in a given year and Americans spend $5 billion on imports from abroad in the same year. What is the amount of America's net exports? Explain how net exports might be a negative amount.

If American exports are $7 billion and imports are $5 billion, then American net exports are +$2 billion.

Is the purchase of an AT&T bond included in the GDP?

No, this is a non-investment transaction; it is merely the transfer of ownership of financial assets. (If AT&T uses the money from the sale of a new bond to carry out an investment in real physical assets, that will be counted.)

The price index during the base year

is always 100%

Q: What are the two major ways of constructing the national income and product accounts?

A: The major components of NIPA can be constructed in either of two ways: by summing the INCOME of the economy or summing SPENDING. Figure 2, a circular flow diagram of the economy, shows why either approach can be used to determine the country's economic activity. Consumer spending by households is revenue for business, and this revenue is used to produce the products that households purchase. Business spending ultimately represents income to the various inputs (factors) of production. The arrows moving in a clockwise direction represent real goods and services purchased by consumers and real inputs (hours worked) by factors of production. The arrows moving in a counterclockwise direction represent money flows, payments for goods and services (revenues to firms), and money payments to factors of production (wages, profits, etc.). In the end, all spending in the economy represents all income.

Why are changes in inventories included as part of investment spending?

Anything produced by business that has not been sold during the accounting period is something in which business has invested—even if the "investment" is involuntary, as often is the case with inventories. But all inventories in the hands of business are expected eventually to be used by business—for instance, a pile of bricks for extending a factory building—or to be sold—for instance, a can of beans on the supermarket shelf. In the hands of business both the bricks and the beans are equally assets to the business, something in which business has invested.

Which of the following did classical economists believe would happen if the product markets accrued surpluses? A.) Prices would rise. B.) Interest rates would rise. C.) Wage rates would fall. D.) The government would fix things.

C.) Wage rates would fall.

Net exports:

Exports minus imports for the current period. Exports include all the items we sell overseas, such as agricultural products, movies, and technology products. Imports are all those items we bring into the country, such as vegetables from Mexico, wine from Italy, and cars from Germany

(T / F) Of all the indices used to predict movements of the business cycle, the yield curve is the only one that has never been wrong in predicting a recession.

False

(T / F) The phases of the business cycle are generally equal in duration and intensity.

False

In what ways are national income statistics useful?

National income accounting does for the economy as a whole what private accounting does for businesses. Firms measure income and expenditures to assess their economic health. The national income accounting system measures the level of production in the economy at some particular time and helps explain that level. By comparing national accounts over a number of years, we can track the long-run course of the economy. Information supplied by national accounts provide a basis for designing and applying public policies to improve the performance of the economy. Without national accounts, economic policy would be guesswork. National income accounting allows us to assess the health of an economy and formulate policies to maintain and improve that health.

Is the money received by Mac when he resells his current-year model Plymouth Prowler to Stan part of GDP?

No, the production of the car had already been counted at the time of the initial sale.

Is the monthly allowance a college student receives from home included in GDP?

No, this is a private transfer payment; simply a transfer of income from one private individual to another for which no transaction in the market occurs (nonproductive).

Is the purchase of 100 shares of GM common stock included in GDP?

No, this is merely the transfer of ownership of existing financial assets. There was no productivity.

Are social security payments received by a retired factory worker included in GDP?

No. It is a transfer payment from taxpayers for which no service is rendered (in this year). It is NONPRODUCTIVE.

Are the services of a painter in painting the family home included in the GDP?

No. This is not a market transaction. If any payment is made, it will be within the family (private transfer).

Refers to GDP in actual market price as they exist each year. It reflects current prices. It is a value of goods and services produced in a given year valued at that year's price. It is GDP that hasn't been adjusted for changes in the price level.

Nominal (constant) GDP

DI=

PI - personal taxes

Why does the business cycle affect durable goods industries more than nondurable goods industries.

People put less priority on upgrading their durable goods during a recession and more during recovery. Nondurable goods need replacement (therefor always having a demand) no matter where the economy resides in the cycle.

Refers to the GDP in actual prices of a previous year, or the average of actual prices in some previous years. It is the value of the final goods & services corrected for inflation/deflation for price level changes. It measures actual production.

Real (adjusted) GDP

Nominal GDP=

Real GDP * price index (decimal)