Macroeconomics Exam 1

Ted quits his $60,000-a-year job to be a stay-at-home dad. What is the opportunity cost of his decision

at least $60,000

A good theory is one that

explains or predicts what it is designed to explain or predict

All economics questions and problems arise because

human wants exceed the resources available

The CPI is used as a cost of living index to adjust the incomes of government workers. Given what we know about the biases in the CPI, incomes that are adjusted using the CPI will typically

increase by more than the actual change in the cost of living.

If the Consumer Price Index increases from month to month we know that

the average price level of consumer goods and services is increasing.

An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is equal to:

the cost of bait, any other monetary expenses, and the value of the best alternative use of the individualʹs time.

Samia has decided that with the two hours in between classes she can do one of 3 things. She has ranked her choices, from highest to lowest as, (1)chat with her friends,(2) study economics or (3) take a nap. The opportunity cost of chatting with her friends is

the value of studying economics, the next best use of time

Which of the following is an example of positive statement?

ʺAn increase in the minumum wage causes higher fast food prices.ʺ

In 1970, the CPI was 39 and in 2000 it was 172. A local phone call cost $0.10 in 1970. What is the price of this phone call in 2000 dollars?

$0.44

According to the information given in the table shown, if someone makes $40,000 in the U.S., what would his salary need to be in Mexico to maintain the same standard of living?

$26,400

The CPI in 1980 was 82, and the CPI in 2010 was 220. If you earned a salary of $100,000 in 2010, what would be a salary with equivalent purchasing power in 1980? (choose the closest answer)

$37,273

Looking at the table above, real average hourly earnings in 2005 (expressed in ʺbase year dollarsʺ) were

$5.63

The CPI in 1980 was 82, and the CPI in 2006 was 202. If you earned a salary of $30,000 in 1980, what would be a salary with equivalent purchasing power in 2006?

$73,902

Assume the market basket for the consumer price index has three products - Cokes, hamburgers, and CDs - with the following values in 2000 and 2006 for price and quantity: The Consumer Price Index for 2000 equals (approximately)

100

Assume the market basket for the consumer price index has three products - Cokes, hamburgers, and CDs - with the following values in 2000 and 2006 for price and quantity: The Consumer Price Index for 2006 equals (approximately)

121

If 2000 is the base year, the inflation rate between 2000 and 2001 is approximately:

13.9%

Between 2007 and 2008, the CPI of a small nation rose from 180 to 185, and household incomes rose by 3% during that period of time. The cost of living in this economy increased by _____(choose the closest answer), and the purchasing power of household income ______ between 2007 and 2008

2.8%; rose

The table above has information about the CPI and nominal wage rate for the country of Syldavia for the years 2000-2002. The reference base year is 2000. The inflation rate in Syldavia from 2001 to 2002 was approximately

9.5%

Which of the above statements demonstrates that economic agents respond to incentives?

Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area; Banks don't take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment; Firms produce more of a particular DVD when its selling price rises.

Which of the following describes the accuracy of the Consumer Price Index?

Changes in the CPI overstate the true rate of inflation.

Economics promotes which of the following as the way to make the best decision?

Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

Economists use the idea of rational choice to

Explain how people use available resources to make the best choice

Which of the following statements is TRUE in a simple circular flow model?

Firms are buyers in the factors of production market.

Which of the following statements concerning ʺequityʺ over ʺefficiencyʺ is true?

Itʹs usually the case that actions which increase equity cause decreases in efficiency

Which arrow in the diagram depicts the following transaction: Starbucks pays its shareholders dividends based on the profits of the company.

J

Which two arrows in the diagram depict the following transaction: Stanley purchases the novel, ʺNightofSorrowsʺ for his summer reading pleasure

K and G

Which of the following is an example of irrational behavior (according to our definition of rationality)?

Lucas estimates that heʹll get $600 of benefit from buying a pair of downhill skis and the price of the skis is $700. He decides to buy the skis.

According to the information in the table shown, if someone were to make $35,000, she would be able to buy the most goods and services if she lived in:

Mexico

Pepeʹs Pizza Company is the owner of the building in which it is located. Pepe could rent out the building for $4000 a month if he didnʹt use it for his restaurant. Bethanyʹs Bakery pays $4000 a month in rent for the building that she uses for her restaurant. Who faces the higher opportunity cost of the building they use for their restaurant?

Neither-- their opportunity costs for the buildings are equal

Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2000 is the base year, then what is the CPI for 2008?

None of the above.

Transactions costs are:

Often cited as a reason why purchasing power parity doesnʹt hold; the time and energy involved with creating an exchange; usually higher when transactions take place internationally

Which of the following correctly describes the relationship between the price level and the inflation rate?

Positive rates of inflation imply that the price level is rising.

Which of the following is a normative statement?

President Obamaʹs healthcare plan is a bad idea.

Which of the following is a positive economic statement?

SUVs result in more emissions of CO2 per mile driven than do compact cars

Which of the following statements is true about scarcity?

Scarcity refers to the situation in which unlimited wants exceed limited resources

Which of the following is an example of a normative (as opposed to ʺpositiveʺ) question?

Should the government provide free prescription drugs to senior citizens

Suppose that the prices of dairy products have risen less than prices in general over the last several years. To which problem in the construction of the CPI is this most relevant?

Substitution Bias

Which of the following best describes the relationship between the price level and the inflation rate?

The inflation rate is the percentage change in the price level from one period to the next.

The table above has information about the CPI and nominal wage rate for the country of Syldavia for the years 2000-2002. Which of the following statements is TRUE?

The nominal wage had more purchasing power in 2001 than it had in 2000

Between 2007 and 2008, the CPI of a small nation rose from 182 to 185. If household incomes rose by 3% during that period of time, which of the following is true?

The purchasing power of household income rose between 2007 and 2008.

Which of the following is normative statement?

The tax burden on the poor in the US is too great.

Which of the following correctly describes the relationship between economic efficiency and economic equity?

There is often a trade-off between the two goals.

Which of the following statements is false?

Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as a stock clearance sale.

Which of the following is a macroeconomics question?

What determines the unemployment rate?

In economics, we assume that people are ʺrationalʺ. That is, economists believe that people:

consider, from their personal perspective, the expected benefits and costs of actions and try to maximize their net benefits

In constructing the CPI, the BLS has to deal with ʺsubstitution biasʺ which is defined the bias in the CPI resulting from

consumersʹ substitution away from goods that become relatively more expensive and toward goods that become relatively cheaper.

The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket.

do not change; under-estimates

Transactions costs are:

often cited as a reason why purchasing power parity doesnʹt hold; the time and energy involved with creating an exchange; usually higher when transactions take place internationally.

Suppose that the prices of dairy products have risen less than prices in general over the last several years. To which problem in the construction of the CPI is this most relevant?

substitution bias