Intro to Macroeconomics: Midterm No.1 Study Set

What is a normative statement?

Expresses an opinion or solution to a topic. Ex: New Orleans should increase their output of blackberries.

What types of countries benefit the most from the catch-up effect?

Poorer economies tend to grow more rapidly that wealthier countries

What are the problems associated with calculating consumers cost of living?

Examples: Ignoring introduction of new goods, substitution bias, ignoring quality and output bias.

How do you calculate CPI?

(Cost of Basket in Given Year/ Cost of Basket in Base Year)X 100

How do you calculate Nominal GDP?

(GDP Deflator)* (Real GDP)/100

How do you calculate GDP Deflator?

(Nominal GDP/Real GDP) X 100

How do you calculate inflation rate with CPI?

(later cpi-earlier cpi /earlier cpi) X 100

What are the eight categories of CPI?

1) Food and Beverage 2) Housing 3) Apparel 4)Transportation 5) Medical Care 6)Recreation 7)Education and Communication 8) Other personal goods and services

What is a demand shock?

A shock that shifts the aggregate demand curve. A positive shock increases the demand and a negative shock decreases the demand.

What is supply shock?

A shock that shifts the aggregate supplycurve. A positive shock increases the demand and a negative shock decreases the demand.

What is CPI?

CPI is the consumer price index. It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.

What is FPI and FDI?

FDI is an investment made by a firm or individual in one country into business interests of another country. FPI refers to investments made in securities and financial assets issued in another country.

What are the four determinants of productivity?

Human Capital: knowledge and skills that workers acquire Physical Capital: stock of equipment and structures that are used to produce goods and services Natural Resources: raw inputs provided by nature Technological Knowledge: society's understanding of the best ways to produce goods and services.

What do we use the circular flow diagram to study?

Income Expenditure

What is a competitive market?

Many buyers and sellers that are price-takers, low barriers to entry

What is the Fischer Equation and how is it calculated?

Measures the relationship between nominal and real interest rates under the effect of inflation. to find real interest rate: ((1+nominal interest rate)/(1+ rate of inflation)) -1 = real interest rate to find nominal interest rate: real interest rate+inflation

How often is CPI data released?

Monthly

How do you calculate real GDP?

Nominal GDP/ GDP Deflator

What is a positive statement?

Objective and fact based descriptions where the statements are precise. Ex: The inflation rate in 3.1% in Texas suburbs

What does a PPF shift imply?

Outward: expansion in the industry Inward: decreased output and decrease in resource

How often is GDP reported?

Quarterly

What is the difference between CPI and GDP deflator?

The GDP deflator measures prices of all goods and services produced domestically. CPI measures prices of market baskets of goods and services bought by consumers.

How is the "Market Basket" formed?

The basket contains all consumer goods and services purchased by households and the prices of those goods measured by the suppliers.

What does the" invisible hand" do?

The invisible hand helps decide what the equilibrium price is for buyers and sellers.

What is GDP?

The market value of all goods and services PRODUCED in the economy in a given period of time.

How do you convert past monetary value to current year value?

Today's Dollars= amount in year t *(CPI today/CPI year T)

A farmer produces lemons and sells them to Fresh Juice, which makes lemon juice. The lemons produced by the farmer are called a) intermediate goods. b)transitory goods. c)final goods. d)inventory goods.

a

For which of the following individuals would the opportunity cost of going to college be highest? a) A famous, highly paid actor who wants to take time away from show business to finish college and earn a degree. b) A student who is the best player on his college basketball team, but who lacks the skills necessary to play professional basketball. c)A promising young mathematician who will demand a high salary once she earns her college degree. d) A student with average grades who has never held a job.

a

If real GDP doubles and the GDP deflator doubles, then nominal GDP a) quadruples. b)triples. c)remains constant. d)doubles.

a

In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily, a) market prices. b)values of goods and services based on surveys of consumers. quantities purchased by a typical c)urban household. d)profits from producing goods and services.

a

Suppose the income of buyers in a market for an inferior good decreases and a technological advancement occurs also. What would we expect to happen in the market? a) Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. b) Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. c) Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d)Equilibrium quantity and price would increase.

a

The bowed-outward shape of the production possibilities frontier can be explained by the fact that a) the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing. b) all resources are scarce. c)economic growth is always occurring. d)the only way to get more of one good is to get less of the other.

a

When economists talk about growth in the economy, they measure that growth as the a) percentage change in real GDP from one period to another. b)absolute change in nominal GDP from one period to another. c)absolute change in real GDP from one period to another. d)percentage change in nominal GDP from one period to another.

a

Which of the following statements does not apply to a market economy? a) Government policies are the primary forces that guide the decisions of firms and households. b)Households decide which firms to work for and what to buy with their incomes. c)Firms decide whom to hire and what to produce. d)the "invisible hand" usually maximizes the income of society as a whole.

a

Your professor loves her work, teaching math. She has been offered other positions in the corporate world that would increase her income by 15 percent, but she has decided to continue working as a professor. Her decision would not change unless the marginal a) cost of teaching increased. b)benefit of teaching increased. c) cost of a corporate job increased. d)benefit of a corporate job decreased.

a

Alyssa, a Mexican citizen, works only in the United Kingdom. The value of the output she produces is a) included in both U.K. GDP and U.K. GNP. b) included in U.K. GDP, but it is not included in U.K. GNP. c)included in U.K. GNP, but it is not included in U.K. GDP. d)included in neither U.K. GDP nor U.K. GNP.

b

Bo buys and sells real estate. Two weeks ago, he paid $400,000 for a house on Cypress Street, intending to spend $50,000 on repairs and then sell the house for $500,000. Last week, the city government announced a plan to build a new landfill on Cypress Street just down the street from the house Bo purchased. As a result of the city's announced plan, Bo is weighing two alternatives: He can go ahead with the $50,000 in repairs and then sell the house for $390,000, or he can forgo the repairs and sell the house as it is for $350,000. He should a) keep the house and live in it. b) forgo the repairs and sell the house as it is for $350,000. c)move the house from Cypress Street to a more desirable location, regardless of the cost of doing so. d)go ahead with the $50,000 in repairs and sell the house for $390,000.

b

For a number of years country A had inflation of 3 percent but for the last five years has had inflation of 6 percent. Country B had inflation of 4 percent for many years, but very recently inflation unexpectedly rose to 9 percent. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment? a) both country A and country B b) country B but not country A c)country A but not country B d) neither country A nor country B

b

Fundamentally, economics deals with a) poverty. b)scarcity. c)banking. d)money.

b

If an economy's GDP falls, then it must be the case that the economy's a) income falls and expenditure rises. b)income and expenditure both fall. c)income falls and saving rises. d)income and saving both fall.

b

If scientists discover that steamed milk, which is used to make lattés, prevents heart attacks, what would happen to the equilibrium price and quantity of lattés? a)The equilibrium price would decrease, and the equilibrium quantity would increase. b) Both the equilibrium price and quantity would increase. c)The equilibrium price would increase, and the equilibrium quantity would decrease. d)Both the equilibrium price and quantity would decrease.

b

In the circular-flow diagram, in the markets for a) goods and services, households and firms are both sellers. b) the factors of production, households are sellers and firms are buyers. c)the factors of production, households and firms are both sellers. d)goods and services, households are sellers and firms are buyers.

b

In the circular-flow diagram, which of the following items flows from firms to households through the markets for goods and services? a) Goods and services b) Dollars spent on goods and services c)Dollars paid to land, labor, and capital d)Wages, rent, and profit

b

The basic principles of economics suggest that a) markets are seldom, if ever, a good way to organize economic activity. b) government should become involved in markets when those markets fail to produce efficient or fair outcomes. c) government should become involved in markets when trade between countries is involved d)government should never become involved in markets.

b

What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages? a)Price will fall, and the effect on quantity is ambiguous. b)Quantity will fall, and the effect on price is ambiguous. c) Quantity will rise, and the effect on price is ambiguous. d)Price will rise, and the effect on quantity is ambiguous.

b

Which of the following events would cause a movement downward and to the left along the supply curve for kiwis? a) The number of sellers of kiwis decreases. b)The price of kiwis falls. c)There is a destruction of technological machinery that increases the cost of producing kiwis. d)The price of soil increases, and soil is an input in the production of kiwis .

b

Which of the following events would unambiguously cause a decrease in the equilibrium price of cotton shirts? a) An increase in the price of wool shirts and a decrease in the price of raw cotton b)A decrease in the price of wool shirts and a decrease in the price of raw cotton c)An increase in the price of wool shirts and an increase in the price of raw cotton d) A decrease in the price of wool shirts and an increase in the price of raw cotton

b

Which of the following statements about models is correct? a) Economic models are usually plastic representations of the economy. b) Because economic models omit many details, they allow us to see what is truly important. c)Economic models are built to mirror reality exactly. d)Economic models are useful, but they should not be used for the purpose of improving public policies

b

Which of the following statements best represents the principle represented by the adage, "There ain't no such thing as a free lunch"? a) Alivia must put gas in her truck before she can drive it to school. b) Benjamin must decide between going to Florida or Brazil for summer vacation. c) Jada is starving and homeless. d) Bo can go swimming only if he takes his brother with him.

b

Which of the following statistics is usually regarded as the best single measure of a society's economic well-being? a)The producer price index b) Gross domestic product c)The size of the government surplus

b

If a seller in a competitive market chooses to charge more than the going price, then a)other sellers would also raise their prices. b)the owners of the raw materials used in production would raise the prices for the raw materials. c)buyers will make purchases from other sellers. d)the sellers' profits must increase.

c

In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker a) decreased by 1.7 percent between 1998 and 2008. b) increased by 4.75 percent between 1998 and 2008. c) increased by 6.25 percent between 1998 and 2008. d) remained unchanged between 1998 and 2008.

c

Tao and Miray are economists. Tao thinks that the wealthiest 10 percent of the U.S. population should be taxed a rate higher than the rest of society because the wealthy are more likely to use more public resources. Miray thinks that everyone should be taxed at the same rate because that is the fairest scenario and the wealthy should not be penalized for their success. In this example, Tao and Miray a)must both be incorrect because tax policy is never that simple. b)disagree because they have access to contradicting positive statements. c) have different normative views about tax policy. d)disagree about the validity of a positive theory.

c

The "invisible hands" ability to coordinate the decisions of the firms and households in the economy can be hindered by a) too much attention paid to efficiency. b) increased competition in markets. c) Answer government actions that distort prices. d) enforcement of property rights.

c

When society requires that firms reduce pollution, there is a) a tradeoff only if some firms are forced to close. b) no tradeoff, since everyone benefits from reduced pollution. c) a tradeoff because of reduced incomes to the firms' owners and workers. d) no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.

c

Which of the following is included in the calculation of GDP? a)The purchase of a new edition of a foreign textbook that was produced in a different nation. b)The purchase of ink and paper supplies by a textbook company for the production of new textbooks. c) The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country. d)The purchase of a used textbook from a friend who took the same class last year.

c

Which of the following is true? a) Efficiency and equality can both be achieved if the economic pie is cut into equal pieces. b)Government policies always improve upon both equality and efficiency. c) Efficiency refers to the size of the economic pie; equality refers to how the pie is divided. d) As long as the economic pie continually gets larger, no one will have to go hungry.

c

A worker in Thailand can earn $12 per day making cotton cloth on a hand loom. A worker in the United States can earn $82 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages? a) United States textile workers belong to a union, whereas Thailand textile workers do not belong to a union. b) Thailand has a low-wage policy to make its textile industry more competitive in world markets. c) There is little demand for cotton cloth in Thailand and great demand in the United States. d) Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.

d

An increase in the price of a good will a)increase quantity demanded. b)decrease supply. c)increase supply. d) increase quantity supplied.

d

Changes in real GDP reflect a)both changes in prices and changes in the amounts being produced. b)only changes in prices. c)neither changes in prices nor changes in the amounts being produced. d) only changes in the amounts being produced

d

For the purpose of calculating GDP, investment is spending on a)stocks, bonds, and other financial assets. b)real estate and financial assets such as stocks and bonds. c)capital equipment, inventories, and structures, excluding household purchases of new housing. d) capital equipment, inventories, and structures, including household purchases of new housing.

d

Large or persistent inflation is almost always caused by a) higher-than-normal levels of productivity. b) excessive government spending. c) foreign competition. d) excessive growth in the quantity of money.

d

Most goods and services produced at home a)are included in GDP while most goods and services produced illegally are excluded from GDP. b)and most goods and services produced illegally are included in GDP. c)are excluded from GDP while most goods and services produced illegally are included in GDP d)and most goods and services produced illegally are excluded from GDP.

d

During periods of inflation, nominal interest rate will be...

lower than the real interest rate

Productivity is defined as the a) actual amount of effort workers put into an hour of working time. b) number of workers required to produce a given amount of goods and services. c)amount of labor that can be saved by replacing workers with machines. d) amount of goods and services produced from each unit of labor input.

d

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should a) not sell the ticket because the marginal benefit is less than the marginal cost. b) sell the ticket because the marginal benefit exceeds the average cost. c) not sell the ticket because the marginal benefit is less than the average cost. d) sell the ticket because the marginal benefit exceeds the marginal cost.

d

Suppose the state of Rhode Island passes a law that increases the tax on beer. As a result, beer consumers who live in Rhode Island start purchasing their beer in surrounding states. Which of the following principles does this best illustrate? Trade can make everyone better off. a)Markets are usually a good way to organize economic b)activity. c)Rational people think at the margin. d)People respond to incentives.

d

The overriding reason why households and societies face many decisions is that a) goods and services are not scarce. b) incomes fluctuate with business cycles. c)people, by nature, tend to disagree. d)resources are scarce.

d

Which of the following events would cause both the equilibrium price and equilibrium quantity of number two grade potatoes to increase if number two grade potatoes are an inferior good? a)Greater government restrictions on agricultural chemicals b)An increase in consumer income c)Fewer government restrictions on agricultural chemicals d)A decrease in consumer income

d

included in GDP because they represent potential consumption. a)included in GDP because they b)represent current income. c)excluded from GDP because they are not private pensions. d)excluded from GDP because they do not reflect the economy's production.

d

How to calculate labour productivity?

output per period/ number of employees at work

What is GNP?

the total value of goods produced and services provided by a country during one year. Calculating GNP: equal to the gross domestic product plus the net income from foreign investments.

What is real GDP?

the value of final goods and services evaluated at base-year prices

What is nominal GDP?

the value of final goods and services evaluated at current-year prices