Econ Test 3

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Suppose workers agreed to a contract that guaranteed a real wage increase of 3 percent per year. If the inflation rate was 7 percent over the following year, what is the required increase in the nominal wage to meet the contract requirements?

10%

Suppose that the Department of Transportation is compiling data on traffic accidents and it wants to present the data in the form of an index. If there were 2,000 accidents in the base year, 2007, and 2,100 accidents in 2008, what is the value of the index for 2008?

105

If the CPI for 2008 was 112, the typical market basket purchased that year would cost

12 percent more than the same market basket purchased in the base year

In the following index, which year is most likely to be the base period: 2003 = 123.3; 2004 = 145.3; 2005 = 111.4; 2006 = 100; 2007 = 94.3?

2006

Suppose that production of a good creates a negative externality. An excise tax equivalent to the difference between the marginal social cost and the marginal private cost of production can correct the inefficiency. T or F

True

Which of the following units is used to measure nominal GDP in the United States?

US dollars

Which of the following is a pure public good?

a fireworks display

Which of the following would be counted in U.S. GDP?

a new US produced radio bought by a Japanese citizen living in Kyoto

Involuntary exchanges, such as robbery,

are not Pareto improvements

Which of the following is an example of a regulatory action?

automobile manufacturers are required to include built-in intact seats

If a newspaper reporter wanted to learn about changes in the U.S. price levels, she would probably get that information by looking at the

consumer price index

Which of the following real-world phenomena does the classical model ignore?

cyclical unemployment

One reason why economists often appear to disagree when asked about the impact of some bad economic news is that

economists often appear to be disagreeing when one is talking about long-run impact while the other is referring to short-run impacts

Classical economists believed that production could be stuck below its full employment level for a long period of time. T or F

false

During a recession, both output and unemployment fall. T or F

false

If Panama has a high opportunity cost of producing salmon steaks, then it should export salmon steaks. T or F

false

If the rate of economic growth is positive, then everyone becomes better off. T or F

false

Most recessions last approximately three years. T or F

false

One macroeconomic goal is to achieve an unemployment rate of zero. T or F

false

Since World War II, there has been a worldwide movement away from free trade policies. T or F

false

The Consumer Price Index (CPI) is a weighted average of all the prices paid by households for goods and services. T or F

false

The U.S. economy experienced fluctuations in employment and output over the last half of the twentieth century. However, the length of the average recession has been about the same as the length of the average expansion. T or F

false

The United States economy has achieved the target rate of unemployment, as set by the Full Employment and Balanced Growth Act (1978), for most years over the last few decades. T or F

false

The equilibrium price of automobiles is a primarily macroeconomic issue. T or F

false

The unemployment rate is usually zero except during recessions. T or F

false

When people buy land, their purchases are included in GDP. T or F

false

Whenever prices are rising, the inflation rate is rising. T or F

false

What is the difference between an intermediate good and a final good?

final goods are finished and ready for sale; intermediate goods require further processing

Even though households do not actually purchase certain items, the government estimates and adds to the consumption component what the household would pay for these items in the marketplace. An example of this type of item is

food that a farm family grows for themselves

Which of the following is a reason why the Consumer Price Index (CPI) is not calculated as a simple average of all prices?

goods differ in their importance in the average consumer's budget

Because of the free rider problem

governmental solutions to externality problems are often needed

If free international trade opens up and a country has a comparative disadvantage in sugar production, we should expect

greater sugar consumption in that country

Anti-trust law

has been used to break up monopolies

A nation should only import those goods for which it has

higher opportunity costs than its trading partner

Susie grows corn in her backyard garden to feed her family. The corn she grows is not counted in GDP because

it was not produced for the marketplace

When a positive externality exists, the marginal social demand curve

lies above the market demand curve

Which of the following is a major macroeconomic goal? 2

low unemployment

The sale of which of the following would appear without any modification in GDP?

maid services

Which of the following is more of a short-run than a long-run goal?

moderating economic fluctuations

If real GDP is increasing at a 2 percent annual rate while the unemployment rate is 7 percent, the economy is

not achieving full economic potential

A market failure in the form of an externality arises when

not all cost and benefits are included in the price of a good

Objections to free trade

often come from those who are harmed by trade

A contract

often requires one party to do something first, and the other party to do something later

Individuals in countries with __________ often spend considerable time trying to secure resources from others.

poorly defined property rights

Assume net exports are -$220, consumption is $5,000, tax revenues are $1,000, government purchases are $1,500, and 2003 GDP, calculated by the expenditure approach, is $8,000. We can conclude that

private investment was $1,720

One way in which antitrust law fosters economic efficiency is by

prohibiting firms from colluding to raise prices

Disputes over resource ownership are the domain of

property law

The rights of a co-owner to a share of a firm's profits are

protected under contract law

Government can play a crucial role in promoting economic efficiency by

providing physical and institutional infrastructures

Which of the following would not be included in the consumption component of GDP?

purchase of a new home

Which of the following statements is true?

real GDP = (nominal GDP / price index) X 100

In only one of the following situations is a nation's standard of living certain to increase. Which one?

real GDP rises faster than population

An economic function of criminal law is to

reduce the number of involuntary exchanges

The two defining characteristics of pure private goods are

rivalry and excludability

Market failure occurs when

some Pareto improvements are not made

Which of the following is a major macroeconomic goal?

stable prices

The prices of which of the following goods would be included in the Consumer Price Index?

tennis shoes

If Country A exports a good to Country B, who is made worse off?

the consumers in Country A and the producers in Country B

Which of the following factors does not help explain incomplete specialization by countries that trade in accordance with comparative advantage?

the cost of making trade deals may have become extremely low because of the existence of the World Trade Organization.

What major historical event led to the most significant challenge to classical economic thinking?

the great depression

The market clearing assumption is

the idea that prices in every market will adjust until quantity supplied and quantity demanded are equal

In a labor market diagram, the point at which the labor supply curve crosses the labor demand curve is

the point at which everyone who wants to work is able to find a job

Monopoly is a prime example of a market failure that leaves potential Pareto improvements unexploited. This is demonstrated by the fact that

the price in a monopolized market exceeds the marginal cost of production

Suppose that the inflation rate was 4 percent in 2002 and 3 percent in 2003. This would mean that

the price level rose at a slower rate in 2003 than in 2002

In a single-price monopoly market

the quantity produced is artificially low, thereby creating an inefficiency

Gross domestic product (GDP) is

the total value of all final goods and services produced for the marketplace during a given period, within a nation's borders

Which of the following is the best example of a stock variable?

the total wealth of the 50 richest us citizens

Many saltwater fish species are currently being overexploited. This is an example of

the tragedy of the commons

If firms make agreements that reduce the amount of competition in a market,

they would face penalties under antitrust legislation

If prices (as measured by the CPI) tripled and nominal wages tripled, what would happen to real wages?

they would remain unchanged

If goods are produced abroad but consumed domestically,

those goods are termed imports

Which of the following is the best example of an intermediate good?

tires purchased by an automobile manufacturer for installation on new cars

One way to achieve efficiency in a market with a negative externality is

to raise the market supply curve to the position of the marginal social cost curve

Which of the following statements correctly describes international trade in accordance with comparative advantage?

trade may well make some citizens in each trading country worse off

What is the main factor that explains why government spending typically exceeds government purchases?

transfer payments

An index number is important only in a relative sense -- in comparison to an index number from another period. T or F

true

Assume that India has a comparative advantage in producing a computer game. The United States has an absolute advantage in producing the same game. Mutually advantageous trade will have India producing and exporting the game while the United States will specialize in producing something else. Tor F

true

Changes in business inventories are part of private investment spending. T or F

true

Contracts tend to increase the level of specialization in an economy. T or F

true

If Armenia can produce rugs more efficiently than any other country, it does not necessarily benefit from producing rugs for international trade. T or F

true

If the actual real wage exceeds the equilibrium wage, there will be an excess supply of labor. T or F

true

Periodic fluctuations in GDP are called business cycles. T or F

true

The Full Employment and Balanced Growth Act of 1978 set the target unemployment rate for the United States economy at 4 percent. T or F

true

According to the Coase theorem,

under certain conditions, the private market will solve externality problems efficiently

In the classical long-run model,

we focus on labor resources, rather than capital or land

The real wage rate measures

what workers are paid in terms of purchasing power

The aggregate production function shows how much output the economy can produce

with different quantities of labor, for given amounts of land and capital, and a given state of technology

Assume that Ernesto earned a nominal wage rate of $15 per hour in 2001, the base year for the CPI. If the CPI in 2002 was 102.6 and his nominal wage rate was $16 per hour, what was his real wage rate in 2001?

$15.00

This year, Tom sold his 1998 minivan to Honest John's Used Car Emporium for $5,000. Honest John then sold the van to Bob for $7,000. How much would be recorded in GDP this year from these transactions?

$2,000

A Texas oil company extracts petroleum and sells it to a refinery for $1,000. After processing, the refinery sells the gasoline to a wholesaler for $1,500, who then sells it to a gas station for $1,700. The gas station sells it to customers for $2,500. In these transactions, how much has been added to GDP?

$2,500

In 2008, Computers, Inc. produced personal computers worth $20 million. If $16 million worth were sold and $4 million worth remained unsold at year end and were added to inventories, how much did Computers, Inc. contribute to GDP in 2008?

$20 million

Fun Time Toys produced $60 million worth of toys in 2008. Because of a slow Christmas shopping season, only $50 million worth was sold to consumers, and the remaining $10 million worth went into inventories. Based on this information, how was GDP affected in 2008?

$60 million was added to GDP; $50 million was classified as consumption spending and $10 million was classified as private investment

From 1929 to 1933, U.S. output dropped by about

25%

If the base year for an index is 2005 and the value of the index in 2008 is 165.1, by what percent has the measure grown over those 3 years?

65.1%

Since the late 1970s, economic growth has

improved the living standards of highly skilled workers while less-skilled workers have become worse off

The Consumer Price Index (CPI)

includes the prices of some used consumer goods

Over the past 80 years, real GDP has

increased dramatically

The marginal social cost (MSC) curve

indicates the total cost of production, when all cost are considered

Which of the following statements is true about the behavior of the CPI?

it has risen steadily since 1960

GDP is a flow variable because

it measures the production that takes place over a period of time


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