Economic Exam 1 Review
Economics is a social science because
All of the above
Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?
All of the above
How does real GDP deal with the problem inflation causes with nominal GDP
All of the above
When the economy is at full employment
All of the above
Which of the following events would create economic growth, that is, shift the production frontier outward?
All of the above
Why in microeconomics can we measure production in terms of quantity, but in microeconomics we measure production in terms of market value?
All of the above
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness economy?
All of the above
August 2013
Both A and B are true
Societies organize their economies in two main ways to answer the three questions of what, how, and who. A society can have a _________ economy in which the government decides how economic resources will be allocated. Or a society can have a ________ economy in which the decisions of households and firms interacting in market allocate economic resources
Centrally planned; market
The price index which is used to measure changes in the cost of living is the
Consumer Price Index (CPI)
a. You purchase a new Ford Escape Hybrid from a Ford dealer
Consumption Expenditure
What are the four major components of expenditures in GDP
Consumption, Investment, Government Purchases, and Net Exports
Which of the following is NOT considered one of the potential biases in calculating the consumer price index?
Coverage bias
Which of the following is NOT a step that the economists use in developing a useful economic model
Make a value of judgement about the merits of the hypothesis
A primary difference between macroeconomics and microeconomics is
Microeconomics examines individual markets while macroeconomics examines the economy as a whole
Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer inShanghai, China
Net Export Expenditure
Which of the following choices shows how data on nominal wages for 2007 to 2013 and data on the consumer price index for the same years can be used to calculate the real wage for these years?
Nominal wages/ Price index *100= real wages
Ford purchases door handles for the Escape from an auto parts manufactuer in Indianan
Not included in GDP calculation
b. You purchase a 2011 (preowned) FordEscape from a friend
Not included in GDP calculation
What points are inefficient? Briefly explain why.
Point V because production there is not using all available resources
At which point is the country's future growth rate likely to be the highest? Briefly explain why.
Point W because it is where the mos resources are used to produce capital goods
Which point(s) are unattainable? Briefly explain why
Point Z becuase it is outside the production possibilities frontier
What point(s) are efficient? Briefly explain why.
Points W, X, and Y becuase this is where the maximum output is produced with available resources
____________ is concerned with what is, and ________ is concerned with what ought to be. Economics is about ____________, which measures the costs and benefits of different courses of actions
Positive analysis, normative analysis; positive analyisis
while equity means that goods are distributed in a way that is
fair
The financial system of a country is important for a long-run economic growth becaue
firms need the financial system to acquire funs from households
The three types of unemployment are
frictional, structural and cyclical unemployment
A person who is in between jobs but actively engaged in a job search is considered
frictionally unemployed
Centrally planned economics allocate resources based on decisions by
government
Crowding out occurs when
governments must borrow funds which causes interest rates to rise and thus private investment is reduced
Potential real GDP
grows over time
The minimum wage law
has only a small effect on the unemployment rate since only a small part of the labor force earns the minimumwage
while market economies answer these questions through decision made by
household and firms
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce
Government unemployed insurance tends to
increase the unemployment rate by lowering the opportunity cost of job search
An efficiency wage
increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied
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
Efficiency means that goods are distributed in a way that
maximizes benefits to society
A _______ economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
mixed
The difference between a nominal variable and a real variable is that
nominal variables are calculated in current-year prices....
Some countries have larger underground economies than do other countries
of government policies that are retarding economic growth
The payment of government unemployment insurance reduces the severity of recession by
preventing a huge drop in income...
Which of the following is the best measure of the standard of living of the typical person in a country?
real GDP per person
The effect of labor unions on overall unemployment is ________ since only a _________ percentage of the laborforce outside the government is unionized
small; small
A type of unemployment most likely to result in hardship for the people who are unemployed is
structural because this type of unemployment requires retraining to acquire new job skills
Experts in hand-drawn animation who remain unemployed due to the film industry's switch to computer
structurally unemployed
By definition, economics is the study of:
the choices people make to attain their goals, given their scarce resources
Opportunity cost is
the highest valued alternative that must be give up to engage in an activity
In determining whether to borrow funs, firms compare the rate of return they expect to make on an investment with
the interest rate they must pay to borrow the necessary funds
Potential real GDP is
the level of GDP attained when all firms are producing at capacity
Macroeconomics conditions affect the decision firms and families make....
the probability of finding a job is higher during economic expansion and lower during recession
The law of demand is the assertion that
the quantity demanded of a product is inversely related to its price
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 increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,
the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power
Suppose that there are three variables involved in the graph to the right...
the third variable
Which of the following factors determines the supply of loanable funds?
the willingness of households and governments to save
Transfer payments are not included in GDP calculations because
transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service
Nominal GDP is GDP in a given year
valued in the prices of that year
Real GDP is GDP in a given year
valued in the prices of the base year
The distinction between a normal and an inferior good is
when income increases, demand for a normal good increases while demand for an inferior good falls.
Unemployment rate in France
would have gone up as the opportunity cost of job search would have decreased
Which one of the following expressions shows the investment-saving equality?
S=Y-C-G
Which of the following steps has not been taken by the Bureau of LaborStatistics (BLS) to reduce the size of biases in the CPI
The BLS has expanded the number of stores from which it connects the price in information to reduce the coverage bias
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy.
The country is operating on its production possibilities fronteir
Relative to the household survey, which of the following is a strength of the establishment survey?
The establishment survey is determined by actual payroll, rather than by the unverified answers of the household survey
What are the implications of this idea for the shape of the production possibilities frontier?
The production possibilities frontier will be bowed outward
What will be the effect of an increase in business taxes on the quantity of investment by firms and the economy's capital stock in the future?
The quantity of investment will decrease and the economy's future capital stock will decrease
Currently, the Bureau of Labor Statistics does not included homemakers...
The unemployment rate would decrease and the labor force participation rate would increase
How would it affect the unemployment rate is the Bureau of Labor Statistics counted as unemployed both (1) discouraged workersand (2) people who work part-time but would prefer to work full-time
The unemployment rate would increase
Which of the following is NOT one of the conditions someone needs to meet to be counted as unemployed?
They had worked only one hour per week during the previous four weeks
The unemployment rate is calculated as follows
Unemployment rate = Number of Unemployed/ Labor Force *100
The three economic questions that every society must answer are:
What goods will be produced, how they will be produced, and who will receive the goods
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
Which equation represents the relationship between GDP and the four major expenditure components
Y=C+I+G+NX
What does increasing marginal opportunity cost mean?
Increasing the production of a good requires larger and larger decreases in the production of another good
e. Ford purchases new machine tools to use in its Missouri Escape factory
Investment Expenditure
Refer to the graph to the right. What is the opportunity cost of moving from point B to point C?
20 sedans (quantity)
According to the law of supply
A and C only ( here is a positive relationsjip; as the price of a product increases, firms will supply more of it to the marker
Indicate which of the following would cause a movement from point A to C (check all that apply)
A rise in the number of buyers; A decline in vegetarianism
"I don't believe in the government price statistics. The CPIfor 2012 was 212, but I know the inflation ratecouldn't have been as high as 112 percent in 2012
Disagree. The inflation rate is the percentage increase in the price level from the previous year, not the base year
"In years when people buy few shares of stock, investment will be low and, therefore, so will GDP"
Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases
What is Costco's CEO referring to?
Efficiency wages
In circular flow of expenditure and income, why must the total value of production is an economy equal the total value of income?
Every penny spent on a good or service must end up as someone's income
How is the GDP deflator calculated?
GDP deflator= Nominal GDP / Real GDP * 100
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
The state of Missouri builds a new highway to help access to the Ford Escape plant
Government Expenditure
GDP is an imperfect measure of economic well-being because it fails to measure what types of production?
Household production and the underground economy
A production possibilities frontier (PPF) is
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
The shift from S1 to S2 represents _______ in the supply of loanable funds
a decrease
The movement from point A to B on D1 is caused by
a decrease in the price of baskets of traditional wings
During an economic expansion, a person would prefer to work in an industry that produces
a normal good because the demand for normal goods should increase with increases in income during economic expansion
Indicate which of the following statements represent positive analysis or normative analysis a. A 50-cent-per-pack tax on cigarettes by teenagers by 12% b. The federal government should spend more on AIDS research c. Rising paper prices will increase textbook prices. d. The price of coffee at Starbucks is too high
a. positive analysis b. normative analysis c. positive d. normative
When economists speak of a surplus, they mean a situation in which
all of the above
Recall the definition of normal and inferior goods...
an inferior good because the demand for inferior goods should increase with decreases in income during a recession
Market price is determined by
both supply and demand
An underground economy involves all of the following except
buying and selling of goods and services by obtaining a permit from the government
When a company reduces production and employment during economic recession, those employees who lose their job are generally
cyclically unemployed
With the shift in supply, the equilibrium quantity of loanable funds
decrease
When business taxes increase, the equilibrium interest rate_________ and the equilibrium quantity of loanable funds ________
decreases; decreases
With the changes in the equilibrium quantity of loanable funds, the quantity of saving_______ and the quantity of investment ________
decreases; decreases
