Macroeconomics Exam 1
cons of redistribution
-administrative costs -reduced incentive to work -tax avoidance, evasion
Benefits of redistribution
-increased in total well being -potential increase in labor force participation
How to solve knowledge problem?
By not relying on a centralized decision maker knowing what's best
imports
p world < P domestic
What do taxes and mean-tested programs do?
reduce incentive to work
Opportunity Cost Principle
the true cost of something is what you must give up to get it
Sources of Comparative Advantage
1. abundant inputs 2. specialized skills 3. mass production
Trade costs
the extra costs incurred as a result of buying or selling overseas, rather than domestically; determine what is traded, and how much is traded
Why do we trade?
We can get a better deal on items
What GDP misses
-non market activities (babysitting) -the shadow economy (drugs, gambling) -leisure is not counted -quality of educated
Actual poverty is less than the official poverty rate because: A. tax credits and no cash benefits aren't included when calculating incomes B. most. people with incomes below the poverty threshold have substantial assets C. most people report incomes below the poverty threshold to evade taxes D. government statistics are notoriously unreliable
A
Amuses works and frequently experiences short term unemployment. When she is working, she saves her income, upon which she relies when she is unemployed. Her approach is consistent with: A. permanent income hypothesis B. leaky bucket C. social safety net D. relative poverty rate
A
In 12 mins, Allie can fold all of the clean towels needed. She can clean the sauna room in 9 minutes. Abby can fold the towels in 10 minutes or clean room in 15 mins. Allie's opportunity cost of folding towels is A. 1.33 B. 0.75 C. 0.67 D. 1.50
A
Much of the rise in income inequality in recent years is from: A. rising gap between the incomes of highly educated and less educated workers B. use of median income levels instead of mean income levels to asses income inequality C. increase in federal minimum wage D. declining government control on wage supports
A
Cornell can type reports faster and more accurately than Alice, so Cornell has a(n): A. comparative advantage B. absolute advantage C. opportunity cost D. specialization
B
Many government programs associated with welfare state are believed to cause deadweight loss since they: A. affect the amount of disposable income that households have to spend B. affect incentives to work and save C. are supported by tax revenues D. are based on the ability to pay principle
B
Social security is a: A. monetary transfer: means tested B. monetary transfer; not means tested C. in kind benefit; means tested D. in kind benefit; not means tested
B
As long as people have different ________, everyone has a comparative advantage in something. A. direct costs B. benefits C. levels of utility D. opportunity costs
D
Economists generally believe that a person should specialize in the production of a good/ service if: A. their PPF is further from origin than that of any other person B. their PPF is close to the origin of any other person C. they can produce the product using more resources than any other person D. they can produce the product while foregoing fewer alternative products than any other person
D
GDP equation
GDP= Consumption + Investment+Government Purchase+Net Exports
social insurance
Government-provided insurance against bad outcomes such as unemployment, illness, disability, or outliving your savings.
What determines world price?
World supply and world demand
import quota
a limit on the quantity of a good that can be imported
Price
a message to potential buyers and sellers; an incentive for buyers and sellers to cooperate; bundle of information
In-kind transfer
a program that provides specific goods or services, rather than income or tax
capitol gains tax
a tax on the profit from the sale of an asset
regressive tax
a tax where those with less income tend to pay a higher share of their income on the tax
Monetary transfers
a transfer in the form of money or a check so there are no restrictions on how the transfer can be spend (e.g., Social Security, unemployment insurance)
equality of outcome
advocate for redistribution polices that create less unequal distribution of income
wealth
all of the assets owned; a stock & is measured at one specific time
poverty line
an income level set by the government below which a family is defined to be in poverty; aka poverty threshold
What explains why people specialize & drives international trade?
comparative advantage
net exports
export spending-import spending
equality of opportunity
fairness requires a level play field; eliminating discrimination
GDP counts
final goods & services (does not include intermediate goods & services)
final goods and services
finished goods and services
Specialization
focusing on specific tasks
intermediate goods and services
goods/services used as inputs in the production of other products
Who wins and loses from a tariff on imports?
government = wins domestic suppliers= wins domestic buyers= lose
Where is there less inequality?
in spending
value added
total sales- cost of intermediate inputs
calculating real GDP 2023 with base 2022
(2023 output x 2022 price)
Rule of 70
= 70/(percentage annual growth rate).
When a country's production mix becomes more specialized due to increased international trade based on comparative advantage: A. some industries in the country will shrink and possibly disappear B. all industries in the country will grow as the economy grows from trade C. the loses in industries without comparative advantage will offset the grains from trade D. the country will find it has less need for trade in the future
A
A decreasing returns to scale production function is one where increasing all inputs by a certain proportion leads to output rising by: A. a larger proportion B. a smaller proportion C. the same proportion D. exactly double the proportion
B
GDP per capita
GDP divided by total population
Real GDP
GDP measured in constant prices
What is the difference between spending from microeconomics versus macroeconomics?
In microeconomics, spending refers to domestic spending, whereas macroeconomics refers to foreign spending
depreciation
a decline in capital due to wear and tear, aging and accidental damage
property rights
control over tangible or intangible resources; without these, there is little incentive
Government stability
corruption and political instability discourage investment and innovation
The Solow Model
jointly consider the production function and capital accumulation; capital stock will grow as long as investment outpaces depreciation; capital accumulation cannot sustain long term economic growth
Marginal principle
price = marginal cost
Gains from Trade
the benefits that come from reallocating resources, goods, and services to better uses
globalization
the increasing economic, political, and cultural integration of different countries
labor productivity
the quantity of good and services that each work can produce per hour of work
free trade
trad with no government restrictions
The knowledge problem
when knowledge needed to make a good decision is not available to the decision-maker
If a bakery buys a second oven, hired a second baker, buys double the number of ingredients, doubles the size of the baker and then produced double the number of cakes, the bakery is experiencing: A. constant returns to scale B. an increase in labor productivity C. technological advancement D. increasing returns to scale
A
Tariff
A tax on imported goods
Total income, total output, and total spending are
All equal
A prediction market is a market where: A. message leads to future actions B. information is disaggregated C. payoffs are linked to whether an uncertain event occurs D. information is missing to make a good decision
C
When trade is based off of comparative advantage: A. producers lose if they become more specialized B. any gains from trade are equally shared across trading partners C. one trading partner may gain at the expense of another D. both trading partners end up better off than when there is no trade
D
Nominal GDP
GDP measured in today's prices
What is the difference between microeconomics and macroeconomics
Microeconomics is the study of individual decisions in specific markets, whereas macroeconomics is the study of the economy as a whole.
Exports
P world> P domestic
The moral of the story of the Solow growth model is that:
capital accumulation alone cannot lead to sustainable economic growth.
capital stock
the total quantity of capital at a point in time
physical capital
tools, machinery, and structures that are inputs in the production process
The tech startup where you worked went out of business. You were worried about depleting your wealth entirely but avoided that outcome thanks to: A. social insurance B. means resting C. the leaky bucket D. workers compensation
A
Along the same aggregate production function, the level of _____ is the same. A. labor B. technology C. capital D. economic growth
B
The power of prices
prices convey information and create incentives
opportunity cost
units given up/units you are gaining
Calculating Real GDP
units of output x average price
fair trade
we should pay more for imports; trade with government restrictions that prove all workers are being paid wages for those involved in production of the good or service
permanent income
your average lifetime income; better way to measure living standards because it can reflect temporary ups and downs
interdependence principle
your economic life depends on decisions made by others
Which of the following is an example of a durable good? A. your haircut B. a soft drink C. your new car D. fresh flowers from the florist
C
Government policies
encourage innovation through intellectual property laws and subsidies
technological process
new methods for using existing resources
Cost benefit principle
pay careful attention to price, trade is only worth while if benefit>cost
What determines average wages?
productivity
investment
purchases of new capital, which increase the economy's productive capacity (businesses)
catch up growth
rapid growth when a poor country invests in its capital
proportional tax
tax where everyone pays the same share of their income (equal tax rate)
Price is functioning as a message when it: A. is a line of communication between buyers and sellers in a market B. creates incentives for changes in production and consumption C. broadcasts useful information D. summarizes all that is happening in the market
A
transfer payments
payments that transfer income from one person to another (social security, unemployed checks)
poverty rate
percentage of people whose family income falls below the poverty line (around 11.4%)
relative poverty
poverty defined according to the living standards of the majority in any given society
means-tested programs
programs for which eligibility is based on income and sometimes wealth
Efficient regulation
provide basic assurance on goods and services; need not too much but not too little
income taxes
taxes collected on all income, regardless of its source
Tax rate
taxes paid/total income x 100%
comparative advantage
the ability to do a task at a lower opportunity cost
Absolute Advantage
the ability to do a task using fewer inputs (tells you who is best at the task BUT not who should do it)
utility
measure of your well being
Production function
models the methods by which inputs are transformed into output (determines the total production possible given a set of ingredients)
income
money you receive in a period of time (not distributed equally); a flow that changes over time
Which is NOT a rationale for the creation of social safety net? A. providing universal health care B. alleviating income inequality C. alleviating economic insecurity D. reducing poverty and providing access to health care
A
Why does Apple design the iphone in California but assemble in China? A. the US has a comparative advantage in design B. China has a lower opportunity cost in design C. the US has a lower opportunity cost in assembly D. China has a comparative advantage in design
A
You hope to find a job, which enables you to earn a high income, but you recognize that others making less may have higher living standards because they have more: A. wealth B. utility C. needs D. income distribution
A
You purchased a new car (this year) for $38000. Six months later, you sell it for $31500. How much does GDP rise because of these two transactions? A. rises by $38000 B. rises by $69500 C. rises by $6500 D. rises by 31500
A
You're performing a competitive analysis for Dove. Your findings indicate a trend toward consumer preference for deodorants made with more natural ingredients. Because of high price competitors, Dove follows your recommendation and enters the natural deodorant market. For Dove, the high price acted as an: A. incentive B. message C. bundle of information D. comparative advantage
A
The official poverty line depends on _____________ and is adjusted every year to reflect changes in cost of living A. only the major wage earner's annual income B. the size and composition of a family C. only the size of family D. only the composition of family
B
Which of the following would lead to a slowdown in economic growth? A. an increase in capital accumulation coupled with technological advancement B. a reduction in the birth rate coupled with an increase in the retirement rate of a population C. an increase in innovation in the economy D. the institution of a savings tax credit
B
Chantelle grows tomatoes and sells them at the farmer's market. Because the price of tomatoes rises, she is encouraged to grow and sell more. This is an example of price functioning as a(n): A. bundle of information B. currency C. incentive D. message
C
The production function Y=f(L,H,K) shows that economic growth can occur if: A. the capital stock in the country depreciates B. human capital increases and the depreciation rate increases C. human capital increases D. human capital increases, labor productivity fails, capital stock in the country depreciates
C
A constant returns to scale production function means that if all inputs are increased by 75%, this should lead to output: A. rising by more than 75% B. falling by less than 75% C. falling by more than 75% D. rising by 75%
D
Medicaid is funded by: A. employee contributions B. federal government only C. state government only D. state and federal government
D
Which is most like an income transfer rather than in-kind transfer? A. membership at gym for a year B. a book C. a custom tailored suit with the recipient choosing style D. a gift card branded through one of the main credit card companies
D
Which country enjoyed catch up economic growth in the second half of the twentieth century?
South Korea
effective marginal tax rate
The sum of higher taxes and reduced benefits accruing from each dollar you earn
Calculating Nominal GDP
Units of output x price per unit
progressive tax
a tax where those with more income tend to pay a higher share of their income in taxes
Technology
key to economic growth; shifts the production function upward
prediction markets
markets whose payoffs are linked to whether an uncertain event occurs
Internal markets
markets within a company to buy & sell scarce resources
What does inequality reflect?
the abundance of the rich and the poverty of the poor
human capital
the accumulated knowledge and skills that make a worker more productive
social security net
the cash assistance, good/services provided by the government to better the lives of those at the bottom of the income distribution (medicaid, earned income tax credit, SNAP, supplemental security income)
ingenerational mobility
the extent to which the economic status of children is independent of the economic status of parents
GDP
the market value of all final goods and services produced within a country in a given period of time (a year)
labor
the sum of all hours worked across the country
Import
to buy goods or services from foreign sellers; if the foreign price is far enough below the domestic price such that foreign price is still cheaper even with trade cost. (foreign price + trade costs) < domestic price
Export
to sell goods or services to foreign countries;; foreign price is far enough above the domestic price even after trade costs are considers. (foreign price-trade costs)>domestic price
which income redistribution would increase total well-being the most? A. someone in the 95th percentile to the 10th percentile B. someone in the 5th quintile to the 4th quintile C. someone below the poverty line to middle class D. someone who earns 200,000 to 150,000
A
During the coronavirus pandemic, global supply chain issues caused the supply of news cars to shift left. What role did price play in the new car market. Price was a(n): A. incentive for potential buyer to purchase a new car B. incentive for the quantity of new cars demanded to rise C. message to potential buyers that the marginal cost of manufacturing new cars is rising D. message to potential buyers that producing new cars is becoming less expensive
C
Which of the following is an example of transfer payments? A. military salaries B. interest earned on savings in bank C. government loans D. unemployment benefits
D
Which of the following would lead to a slowdown in economic growth? A. reduced inefficiency in production B. an increase in human capital C. an increase in the dependency ratio D. an increase in capital accumulation in the economy
C
absolute poverty
the point at which a household's income falls below the necessary level to purchase food/ shelter to physically sustain its members
Which benefit could a country gain from using internal markets? A. reduced profits and reduced competition B. access to more input markets and greater levels of competition C. decreased market power and reduced costs of production D. better allocation of its resources and more accurate predictions
D
Which statement describes a poverty lines based on absolute poverty? A. the income level that separates the bottom and second quintiles in the distribution of income B. household assets are worth less than a third of the average household assets in the nation C. income is below $5 per person in the household D. income that provides less than the average household is able to buy
C
Social insurance programs do NOT: A. set individual benefits based on past income B. obtain revenue through program specific taxes and fees C. cover both rich and poor D. use a means test to qualify people for benefits
D
The government passed a new investment tax credit initiative. Which input in the production function changes, and what is the effect on economic growth in the country? A. the capital stock decreases, and economic growth is negatively affected B. human capital is enhanced, and economic growth is positively affected C. technological advance occurs, but there is no effect on economic growth D. the capital stock increases, and economic growth is positively affected
D
When a manager uses comparative advantage to assign tasks in a workplace, then each: A. task is assigned to the worker who is best at doing the task B. worker is assigned to the tasks for which he or she has the highest efficiency C. worker learns how to do all tasks to increase flexibility in assignments D. task is assigned to the worker with the lowest opportunity cost for performing the task
D
Which of the following are included in investment A. military spending and the construction of a highway by the federal government B. military spending, purchase of an aircraft by domestic airline, social security payments, construction of a highway by the federal government C. purchase of an aircraft by domestic airline, the purchase of bonds, the purchase of stock D. the purchase of an aircraft by a domestic airline
D
You pay a plumber to install a new dishwasher in your home. Which statement is FALSE? A. you experience gains from trade because you received service B. The plumber experiences gains from trade because they earned income C. Markets orchestrated the gains from trade in this transaction D. Only the plumber experiences gains from trade because they received money
D
