intermediate macroeconomics exam 1

1. If your grandmother receives Social Security, how is she affected by the CPI's bias? 2. If you pay income and Social Security taxes, how does the CPI's bias affect you? 3. Is the government giving your grandmother too much of a COLA? 4. How does your grandmother's "basket" differ from the CPI's? does this affect your answer to Q1 / Q3?

1. Better off (if she receives more COLA than actually required, not less) 2. Worse off (you pay more taxes so that more COLA can be given to retirees) 3. If CPI has continuously overstated actual inflation, then yes. Otherwise, no. 4. Medical bills make up bigger part of her basket --> She buys limited products, those of which do not totally represent actual demand-oriented market. --> Makes previous answers stronger.

What are 3 reasons why the CPI may overstate inflation?

1. Substitution bias --> the CPI uses fixed weights, so it cannot reflect consumers' ability to substitute toward goods whose relative prices have fallen 2. Introduction of new goods --> the introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI because the CPI uses fixed weights. 3. Unmeasured changes in quality --> quality improvements increase the value of the dollar but are often not fully measured

What are the 4 expenditure components of GDP?

Consumption (C), Investment (I), Government spending (G), Net exports (NX)

value of final goods produced sum of value added at all stages of production

GDP

what is used as one measure of the price level?

GDP deflator

examples of endogenous variables?

P, Qd, Qs

the BLS obtains a second measure of employment by surveying businesses, asking how many workers are on their payrolls

The Establishment Survey

Suppose a firm: o Produces $10 million worth of final goods o Sells only $9 million worth o Does this violate the expenditure = output identity?

This does NOT violate the expenditure = output identity --> The unsold goods that are produced and ready for sale but not sold are also part of output, which is sold in the next accounting period would still be calculated as sale in the current period --> unsold output goes into inventory and is counted as an "inventory investment"

Identifying Value Added · A farmer grows a bushel of wheat and sells it to a miller for $1 · The miller turns the wheat into flour and sells it to a baker for $3 · The baker uses the flour to make a loaf of bread and sells it to an engineer for $6 · The engineer eats the bread. · Compute the value added at each stage of production and GDP.

Value added: - $1 - $2 - $3 - $0 GDP (sum of each value added) = $6 (1 + 2 +3 + 0)

formula for GDP?

Y = C + I + G + NX

examples of exogenous variables?

Y, Ps

If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately _____ percent. a. 2 b. 3 c. 5 d. 8

a. 2

If Y = (AK^0.5)(L^0.5) and A, K, and L are all 100, the marginal product of capital is: a. 50 b. 100 c. 200 d. 1000

a. 50

Other things equal, an increase in the interest rate leads to: a. A decrease in the quantity of investment goods demanded b. No change in the quantity of investment goods demanded c. An increase in the quantity of investment goods demanded d. Sometimes an increase and sometimes a decrease in the quantity of investment goods demanded

a. A decrease in the quantity of investment goods demanded

Exhibit: Saving, Investment, and the Interest Rate 1 <look at chapter 3, #14 diagram> The economy begins an equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant? a. Point A b. Point B c. Point C d. Point D

a. Point A

All of the following are types of macroeconomics data except the: a. Price of a computer b. Growth rate of real GDP c. Inflation rate d. Unemployment rate

a. Price of a computer

An increase in the price of imported goods will show up in: a. The CPI but not in the GDP deflator b. The GDP deflator but not in the CPI c. Both the CPI and the GDP deflator d. Neither the CPI nor the GDP deflator

a. The CPI but not in the GDP deflator

Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is: a. $10,000 b. $12,000 c. $20,000 d. $22,000

b. $12,000

Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of GDP is: a. 10 pieces of fruit b. $7 c. $8 d. $10

b. $7

If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately _____ percent, a. 3.5 b. 4.7 c. 4.9 d. 7

b. 4.7

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will: a. Increase b. Decrease c. Remain unchanged d. Either increase or decrease, depending on whether consumption is greater or less than investment

b. Decrease

Macroeconomic models are used to explain how __________ variables influence __________ variables. a. Endogenous; exogenous b. Exogenous; endogenous c. Microeconomic; macroeconomic d. Macroeconomic; microeconomic

b. Exogenous; endogenous

An example of an imputed value in the GDP is the: a. Value added of meals cooked at home b. Housing services enjoyed by homeowners c. Rental services of automobiles to their owners d. Value of illegal drugs sold

b. Housing services enjoyed by homeowners

The production function feature called "constant returns to scale" means that if we: a. Multiply capital by z1 and labor by z2, we multiply output by z3 b. Increase capital and labor by 10 percent each, we increase output by 10 percent c. Increase capital and labor by 5 percent each, we increase output by 10 percent d. Increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.

b. Increase capital and labor by 10 percent each, we increase output by 10 percent

In a simple model of the supply and demand for pizza, when buyers' income increases, the price of pizza __________ and the quantity purchased __________. a. Increases; decreases b. Increases; increases c. Decreases; increases d. Decreases; decreases

b. Increases; increases

In the classical model with fixed income, a reduction in the government budget deficit will lead to a: a. Higher real interest rate b. Lower real interest rate c. Higher level of output d. Lower level of output

b. Lower real interest rate

Exhibit: Saving, Investment, and the Interest Rate 1 <look at chapter 3, #15 diagram> The economy begins an equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods? a. Point A b. Point B c. Point C d. Point D

b. Point B

Consumption depends __________ on disposable income, and investment depends __________ on the real interest rate. a. Positively; positively b. Positively; negatively c. Negatively; negatively d. Negatively; positively

b. Positively; negatively

The amount of capital in an economy is a(n) __________, and the amount of investment is a(n) __________. a. Flow; stock b. Stock; flow c. Final good; intermediate good d. Intermediate good; final good

b. Stock; flow

(form of investment) spending on plant and equipment

business fixed investment

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If capital and labor are paid their marginal products, they receive the shares of income: a. 0.3 and 0.3 b. 0.7 and 0.7 c. 0.3 and 0.7 d. 0.7 and 0.3

c. 0.3 and 0.7 (30% is paid to capital, the rest is paid to labor)

If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator? a. 0.79 b. 1.03 c. 1.27 d. 3.2

c. 1.27

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor-force participation rate equals _____ percent. a. 50 b. 58 c. 60 d. 67

c. 60

According to Goldin and Katz, the increasing income inequality of recent decades is the result of: a. Increases in the rates of skill-biased technological advancement and educational attainment b. Decreases in the rates of skill-biased technological advancement and educational attainment c. An increase in the rate of skill-biased technological advancement and a slowdown in educational advancement d. A decrease in the rate of skill-biased technological advancement and an increase in the rate of educational advancement

c. An increase in the rate of skill-biased technological advancement and a slowdown in educational advancement

According to the model developed in Chapter 3, when taxes decrease without a change in government spending: a. Consumption and investment both increase b. Consumption and investment both decrease c. Consumption increases and investment decreases d. Consumption decreases and investment increases

c. Consumption increases and investment decreases

According to the definition used by the US Bureau of Labor Statistics, people are considered unemployed if they: a. Are out of a job but not looking for work b. Retired from the labor force before age 65 c. Do not have a job but have looked for work in the past four weeks d. Are absent from work because of bad weather or illness

c. Do not have a job but have looked for work in the past four weeks

When the demand for loanable funds exceeds the supply of loanable funds, households want to save __________ than firms want to invest, and the interest rate __________. a. More; rises b. More; falls c. Less; rises d. Less; falls

c. Less; rises

Macroeconomic models: a. Assume that all wages and prices are sticky b. Assume that all wages and prices are flexible c. Make different assumptions to explain different aspects of the macroeconomy d. Focus primarily on the optimizing behavior of households and firms

c. Make different assumptions to explain different aspects of the macroeconomy

Real GDP is a better measure of economic well-being than nominal GDP because real GDP: a. Excludes the value of goods and services exported abroad b. Includes the value of government transfer payments c. Measures changes in the quantity of goods and services produced by holding prices constant d. Adjusts the value of goods and services produced for changes in the foreign exchange rate.

c. Measures changes in the quantity of goods and services produced by holding prices constant

GNP equals GDP __________ income earned domestically by foreigners __________ income that nationals earn abroad. a. Plus; plus b. Minus; minus c. Minus; plus d. Plus; minus

c. Minus; plus

The inflation rate is a measure of how fast: a. The total income of the economy is growing b. Unemployment in the economy is increasing c. The general level of prices in the economy is rising d. The number of jobs in the economy is expanding

c. The general level of prices in the economy is rising

The CPI is determined by computing: a. An average of prices of all goods b. The price of a basket of goods and services that changes every year, relative to the same basket in a base year c. The price of a fixed basket of goods and services, relative to the price of the same basket in a base year. d. Nominal GDP relative to real GDP

c. The price of a fixed basket of goods and services, relative to the price of the same basket in a base year.

updates the base year every year, so it is more accurate than constant-price GDP

chain-weighted real GDP

a measure of the overall level of prices published by the Bureau of Labor Statistics (BLS) uses: o Tracking changes in the typical household's cost of living o Adjusting many contracts for inflation ("COLAs") o Allowing comparisons of dollar amounts over time

consumer price index (CPI)

the value of all goods and services bought by households, including durable goods, nonsurable goods, and services

consumption (C)

If GDP measured in billions of current dollars is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are: a. $131 b. -$131 c. $31 d. -$31

d. -$31

The prices received by each factor of production is determined by: a. Demand for output and supply of factors b. Demand for factors and supply of output c. Demand and supply of output d. Demand and supply of factors

d. Demand and supply of factors

In an economic model: a. Exogenous variables and endogenous variables are both determined outside the model b. Endogenous variables and exogenous variables are both determined within the model c. Endogenous variables affect exogenous variables d. Exogenous variables affect endogenous variables

d. Exogenous variables affect endogenous variables

In a simple model of the supply and demand for pizza, when the price of cheese increases, the price of pizza __________ and the quantity purchased __________. a. Increases; increases b. Decreases; increases c. Decreases; decreases d. Increases; decreases

d. Increases; decreases

In the relationship expressed in functional form Y = G (K, L), Y stands for real GDP, K stands for the amount of capital in the economy, and L stands for the amount of labor in the economy. In this case G( ): a. Is the growth rate of real GDP when the amount of capital and labor in the economy is fixed b. Indicates that the variables inside the parentheses are endogenous variables in the model c. Is the symbol that stands for government input into the production process d. Is the function telling how the variables in the parentheses determine real GDP

d. Is the function telling how the variables in the parentheses determine real GDP

In the classical model with fixed income, if the interest rate is too high, then investment is too __________, and the demand for output __________ the supply. a. High; exceeds b. High; falls short of c. Low; exceeds d. Low; falls short of

d. Low; falls short of

An assumption of __________ is more plausible for studying the short-run behavior of the economy, while an assumption of __________ is more plausible for studying the long-run, equilibrium behavior of the economy. a. Deflation; inflation b. Inflation; deflation c. Flexible prices; sticky prices d. Sticky prices; flexible prices

d. Sticky prices; flexible prices

In a simple model of the supply and demand for pizza, the endogenous variables are: a. The price of pizza and the price of cheese b. Aggregate income and the quantity of pizza sold c. Aggregate income and the price of cheese d. The price of pizza and the quantity of pizza sold

d. The price of pizza and the quantity of pizza sold

In the classical model, what adjusts to eliminate any unemployment of labor in the economy? a. The average price level b. The interest rate c. The real rental price of capital d. The real wage

d. The real wage

If increase immigration raises the labor force, the neoclassical theory of distribution predicts that: a. The real wage will rise, and the real rental price of capital will fall b. Both the real wage and the theory rental price for capital will fall c. Both the real wage and the real rental price for capital will rise d. The real wage will fall, and the real rental price of capital will rise

d. The real wage will fall, and the real rental price of capital will rise

Two equivalent ways to view GDP are as the: a. Total payments made to all workers in the economy or the total profits to all firms and businesses in the economy b. Total expenditures on all goods produced in the economy or the total income earned from producing all services in the economy c. Total profits of all firms and businesses in the economy or the total consumption of goods and services by all households in the economy d. Total income of everyone in the economy or the total expenditure on the economy's output of goods and services

d. Total income of everyone in the economy or the total expenditure on the economy's output of goods and services

According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal: a. Total investment b. Total saving c. Total profits d. Total output

d. Total output

variables determined in the model

endogenous

variables determined outside the model the model takes their values and behaviors as a given

exogenous

__________: o Buy/hire factors of production, use them to produce goods and services o Sell goods & services

firms

(stock or flow?) a person's annual savings

flow

(stock or flow?) how much time you spend studying

flow

(stock or flow?) number of new college graduates this year

flow

(stock or flow?) the government budget deficit

flow

(stock or flow?) the inflation rate

flow

quantity measured per unit of time

flow

includes all government spending on goods and services EXCLUDES transfer payments, such as unemployment insurance (they are not g&s)

government spending (G)

total income earned by domestically located factors of production, regardless of nationality

gross domestic product (GDP)

total income earned by the nation's factors of production, regardless of where located

gross national product (GNP)

__________: o Own the factors of production, sell/rent to firms for income o Buy and consume goods & services

households

the percentage increase in the overall level of prices

inflation rate

(form of investment) the change in value of all firms' inventories

inventory investment

spending on capital, a physical asset used in future production, including: -business fixed investment -residential fixed investment -inventory investment

investment (I)

states that each factor input is paid its marginal product a good starting point for thinking about income distribution

neoclassical theory of distribution

(real or nominal GDP?) measures the values of g&s using current prices

nominal GDP

another measure of the price level the ratio of nominal to real consumer spending

personal consumption expenditures (PCE) deflator

(real or nominal GDP?) measures the values of g&s using the prices of a base year

real GDP

(form of investment) spending by consumers and landlords on house units

residential fixed investment

(stock or flow?) a person's wealth

stock

(stock or flow?) number of people with college degrees

stock

(stock or flow?) the balance on your credit card statement

stock

(stock or flow?) the government debt

stock

(stock or flow?) the size of your iTunes collection

stock

quantity measured at a point in time

stock

(stock or flow?) the employment rate

stock newly employed per month? flow employment rate? stock

value of output minus the value of the intermediate goods (inputs, i.e., metal for a phone) used to produce that output

value added

What are some examples of factor payments?

wages, profits, rent, interest, and dividends on assets