econ 301 Chapter 1-3

In 2016, total U.S. GDP was about _____ , U.S. per capita GDP was _____ , and U.S. average borrowing per person from abroad was about $1,573.

$18.6 trillion; $57,638

A firm is considering a number of investment projects with different rates of return. Project A would cost $10,000 and earn a rate of return of 5 percent; Project B would cost $8,000 and earn 3 percent; and, Project C would cost $6,000 and earns 7 percent. If the real interest rate were to decrease from 6 percent to 2 percent during the firm's planning stage, then its planned investment would increase from:

$6,000 to $24,000.

When disposable income is $6,000, government purchases are $800, consumption is $4,000, and tax revenues are $800, then total output is equal to:

$6,800.

In 2012, a residential home built in 2004 is sold. The home sold for $140,000 in 2004. The home sold for $146,000 in 2012. In 2012, the real estate agent brokering the transaction made $5,000, and the mortgage company earned $2,000. How much did this transaction contribute to GDP in 2012?

$7,000

When a competitive firm has hired an additional worker at a real wage of W / P = 6 hamburgers per hour, and the worker produces an additional 6 hamburgers, then the firm should hire _____ additional workers if their only goal is to maximize profits.

0

For the production function Y = K0.5 L0.5, output is 100 when K = L = 100. In this case, the marginal product of labor is:

0.5

For the production function Y = K0.3 L0.7, output is 100 when K = L = 100. The marginal product of labor is:

0.7.

A panel of economists appointed by the Senate Finance Committee in 1995 concluded that the best estimate of the upward bias in the inflation rate as measured by the percentage change in the CPI was about _____ percent per year.

1.1

Bill sells his car to a used car dealer for $4,000, which then sells it to another household for $5,000. Together, these transactions add _____ dollars to the GDP.

1000

A borrower has agreed to pay 12 percent on a home equity loan, and the inflation rate during the current year is 5 percent. This borrower faces a nominal interest rate of _____ percent and a real interest rate of _____ percent.

12; 7

An economy produces computer chips and red peppers. In 2014, one pound of red peppers costs $10, a computer chip costs $10, and the economy produces 10 pounds of red peppers and 10 computer chips. In 2015, when the economy produces 5 pounds of red peppers and 20 computer chips, one pound of red peppers costs $20, and a computer chip costs $5. Real GDP in 2014 (at 2014 prices) is _____.

200

An economy has a labor force of 120 million and total employment of 90 million. In this economy, the unemployment rate is _____ percent.

25

Assume that the consumption function is given by C = 500 + 0.75 (Y − T). If income increases by 100, then saving will increase by:

25

Suppose that consumers purchase fish and cell phones. In 2010, one pound of fish costs $1, a cell phone costs $1, and the typical consumer buys 10 pounds of fish and 10 cell phones. In 2011, one pound of fish costs $2, a cell phone costs $0.50, and the typical consumer buys 5 pounds of fish and 20 cell phones. In 2012, one pound of fish costs $2.10, a cell phone costs $0.90, and the typical consumer buys 12 pounds of fish and 20 cell phones. Using 2010 as the base year, the inflation rate between 2011 and 2010 is _____ percent.

25

Suppose that nominal GDP increases by 5 percent in a year when the inflation rate, as measured by the percentage change in the GDP deflator, is 2 percent. This means that the real GDP growth rate is approximately _____ percent in that year.

3

The marginal product of labor for the production function Y = 2K + 3L is:

3

The GDP statistic is computed every _____ by the Bureau of Economic Analysis.

3 months

If the unemployment rate is 7 percent and the number of unemployed people is 3 million, then, rounded to the nearest million, the labor force equals _____ million people.

43

Suppose that the consumption function is given by C = 500 + 0.75 (Y − T). If taxes decrease by 200, then saving will change by:

50

When the economy is characterized by the consumption function C = C(Y − T) = 500 + 0.75 (Y − T), and income increases by 100, and taxes increase by 20, then consumption will increase by:

60

constant returns to scale

A property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion.

competitive firm

A situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices. Firm can sell as much as it wants without causing the price of the good to fall, or it can stop selling without the price of the good to rise. Also cannot influence the wages of the workers it employs.

Which of the following is NOT an example of investment?

Bill purchases a home in 2015 that was built in 2005.

The _____ is responsible for compiling the CPI from the prices of thousands of goods and services.

Bureau of Labor Statistics

The government runs a budget surplus when:

G + Transfer Payments < Taxes.

_____ refers to the market value of all final goods and services produced within an economy in a given period of time.

GDP

Which of the following statements about the simple circular flow diagram in the text is NOT correct?

Households generate income through production

The CPI has a fixed basket of goods and is an example of a _____ index.

Laspeyres

The Federal Reserve uses the percentage change in the _____ as its preferred gauge of how quickly prices are rising.

PCE deflator

Factors of Production

The inputs used to produce goods and services. The two most important factors of production are capital and labor.

Production Function

The mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced; for example, Y = F (K, L).

When a foreign corporation produces automobiles in Alabama and employs foreign engineers, the compensation paid to these engineers is part of _____ GDP and _____ GNP.

U.S.; the foreign

In the equation Profit = PY − WL − RK, total factor costs to a firm are represented by:

WL + RK.

Identify the production function that does NOT exhibit constant returns to scale.

Y = K0.3 L0.8

Suppose that nominal GDP increases by 6 percent in a year when real GDP increases by 3 percent. This means that the inflation rate, as measured by the percentage change in the GDP deflator, is approximately _____ percent in that year.

`3

In the United States, in practice, the differences among the measures of inflation computed using the CPI, the GDP deflator, and the PCE deflator:

are small

The production function Y = 5K0.3L0.7 has _____ returns to scale.

constant

The PCE deflator is the ratio of nominal _____ spending to real _____ spending.

consumer, consumer

When the government increases Social Security payments, demand for goods and services is affected because of changes in disposable income. This causes changes in:

consumption

Since 1995, the Bureau of Economic Analysis has produced chain-weighted measures of real GDP. With chain-weighted measures, the base year changes:

continuously over time.

According to the text, the two largest income categories in the United States in 2016 were compensation of employees and:

corporate profits.

A person with two paying jobs is _____ in the household survey.

counted once

When investment spending decreases in response to an increase in government purchases, this is called:

crowding out

When government increases purchases of goods and services and at the same time increases taxes so that public saving are unchanged, then:

crowding out will occur because national saving will fall.

The GDP deflator measures _____ prices relative to _____ prices.

current; base-year

Crowding out occurs when a(n):

decrease in public saving decreases investment.

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then saving exceeds investment, and the real interest rate MOST likely will

decrease.

With an unchanged number of unemployed workers, retirements of employed workers will _____ the labor force participation rate and will _____ the unemployment rate.

decrease; increase

When government borrowing increases, then national savings will fall and the real interest increases; this MOST likely _____ the quantity demanded of investment.

decreases

C + I + G is the _____ for the economy's output, and F(K, L) is the _____ of the economy's output.

demand; supply

The production function Y = K0.5 L0.5 exhibits _____ marginal product of labor.

diminishing

The marginal propensity to consume is the increase in consumption when:

disposable income increases by one dollar.

If consumers decide to increase saving, then C decreases, r decreases, I increases, and Y:

does not change

The _____ survey measures the employment of workers that firms have on their payrolls.

establishment

The market clearing model is useful in describing the market for haircuts because

even though haircut prices are slow to change they consistently adjust toward the market clearing equilibrium price over time

All of the following are examples of a factor payment from abroad EXCEPT: - exports of corn to Niger. - an interest payment by the Greek government to a U.S. holder of its debt. - compensation of a U.S. manager working in Thailand. - repatriation of profits earned by a U.S. company in Spain.

exports of corn to Niger.

Suppose that an economy has the production function Y = K0.5L0.5, with K = 10,000, and L = 400. The consumption function is C = 0.6(Y − T), G = 500, T = 0.25Y, and I = 1,000 − 40r. If government spending falls to 420, then the real interest rate will _____, and investment will rise by 80.

fall by 2

According to the text, a competitive firm is defined as a:

firm that cannot influence prices in any market.

In microeconomics, when economists state that households and firms "optimize," they mean that:

firms make production decisions to maximize their profits and households maximize their utility.

Changes in the level of G and/or T made by the government are called _____ policy.

fiscal

The core inflation rate measures the increase in price of a consumer basket that excludes:

food and energy

GDP equals _____ minus factor payments from abroad plus factor payments to abroad.

gross national product (GNP)

The ratio of labor income to total income in the United States has been approximately constant at about 2/3 since 1960. This:

implies that capital's share of total income has been approximately constant over this period.

If consumption depends on the real interest rate as well as on disposable income, then national saving will MOST likely _____ when r increases.

increase

Crowding out occurs when a(n):

increase in government purchases decreases investment.

In the neoclassical model in which saving does not depend on the interest rate, if the government decides to decrease G, then C does not change, r decreases, I ____, and Y does not change.

increases

When _____, the _____ rate tends to decrease.

inflation increases; unemployment

National saving represents the amount of output that has not been claimed by consumers and the government. In equilibrium, in the closed economy, national saving must equal:

investment

When the real interest rate changes, demand for goods and services is affected because of changes in:

investment

According to the classical model, if an economy is in equilibrium with C + I + G = Y, and consumers decide to increase spending because of a stock market boom, then:

investment will drop because r increases.

According to the classical model with fixed factors of production, an increase in spending on public infrastructure projects such as new airports, roads, and railways will increase government purchases and decrease:

investment.

The _____ is the percentage of the adult population that is in the labor force.

labor-force participation rate

Since the early 1980s, inflation in the United States has been relatively _____ and relatively _____.

low; stable

Gross domestic product (GDP):

measures an economy's total income as well as the total expenditure on the output of the economy.

S = Y − C − G is _____ saving, while Y − T − C is _____ saving.

national; private

GDP is a measure of the _____ of an economy; this implies that GDP measures domestic production.

output

Firm revenue is a measure of _____, while factor payments are a measure of _____.

output; income

Real GDP is often plotted using a logarithmic scale. On such a scale, equal distances represent equal _____ changes.

percentage

Y − C − T is _____ saving, while T − G is _____ saving.

private; public

If a household has a lower marginal propensity to consume the higher its disposable income, then the consumption function for the household has a shape similar to that of the:

production function.

In the long run, the economy's output is determined by the quantity of factors of production available and the:

production function.

All variables in the classical model are measured in _____ terms; this means they represent quantities of goods and services.

real

The demand for investment depends on the true cost of borrowing, which is called the _____ interest rate.

real

All else equal, a _____ in taxes would _____ by the marginal propensity to consume multiplied times the amount of the reduction in taxes.

reduction; increase consumption

The price of a good is observed to rise at the same time that the quantity purchased rises. This can be explained by a _____ the good.

rise in demand for

A company is considering the purchase of a solar generator. This generator costs $20,000, does not depreciate, and reduces energy cost by $1,000 each year. If the real cost of borrowing currently is at r = 6 percent, then this firm _____ the solar generator if profit is the only consideration.

should not purchase

In the classical model with fixed income:

supply determines the total output produced in the economy.

Factor Prices

the amounts paid to each unit of the factors of production

real wage

the payment to labor measured in units of output rather than in dollars. W/P

Economic growth since 2009 has been lower than normal because:

the recovery from the Great Recession have been very slow.

In the simple circular flow diagram in the text, income is measured as:

the sum of wages and profits.

Graphing the production function with constant capital but increasing amounts of labor generates a curve that is:

upward sloped, with a decreasing slope.

Macroeconomics can be considered a science because it

uses real world data to test and confirm predictions, constitutes a systematized body of knowledge based on observed facts

When the quantity of labor and capital does not change, output produced:

will increase with improved technology.

Mathematically, a production function has constant returns to scale if:

zY=F(zK, zL)