Chapter 16

Recession

A __________ is a downturn of the economy, as determined by the NBER. Boom Depreciation Recession Bust

$250 $400 $250 $160

A small island economy produces 25 rafts in 2015 and sells them at a price of $10 per raft. In 2016, the island produces 16 rafts and sells them at $25 per raft. Nominal GDP in 2015 is $_________ Nominal GDP in 2016 is $________ Real GDP in 2015, using 2015 as the base year, is $__________ Real GDP in 2016, using 2015 as the base year, is $__________

High inflation.

All of the following are vital ingredients for experiencing economic growth except ____________. Competition. Human capital. Honesty. High inflation.

a purchase of a pizza oven by an Italian restaurant.

An example of fixed investment spending for a business is $15 million of unsold furniture at a furniture store. a purchase of a pizza oven by an Italian restaurant. a purchase of a home by a household. a purchase of a corporate bond by Google.

Yes, if politicians are interested in reelection, they might lie about the true state of the economy to gain votes.

Application 16.2 suggests that there's no harm in having the group that declares recessions be independent of government. Can you think of one reason why, in a democracy, it might be a good thing to separate the managers of the economy from the body that evaluates how that economy is doing? Yes, if politicians are interested in reelection, they might lie about the true state of the economy to gain votes. No, if the group that declares recessions is independent, then government will be less accountable for its actions. No, if government evaluates the economy, it can better determine which policies to use when the economy is bad. Maybe, if the independent group is not subject to policy lags, then it can reduce or possibly even prevent a recession.

more than twice

Because of the underground economy, the typical Bolivian is equally more than twice less than twice as well off as the typical Cambodian.

$8833

Bolivia has an official GDP per capita of $5,300; the country's underground economy is estimated to be two-thirds the size of its official economy. Cambodia has an official GDP per capita of about $2,650, and its underground economy is about half the size of its official economy. When the transactions of the underground economy are included, GDP per capita in Bolivia is $__________

business cycles

Deviations from the long, steady trend of GDP are called business cycles recessions growth cycles

Yes, it opens up opportunities for countries to tap into the global market to sell the goods they are best at producing.

Do countries that open their borders to international trade tend to grow more rapidly than countries that do not? No, it forces countries to specialize in products that they may not like to produce or be forced out of the market. Maybe, but success is usually limited to a few countries, with only minimal differences noted in overall well-being. No, the increased competition from foreign imports forces most of the domestic producers out of the market. Yes, it opens up opportunities for countries to tap into the global market to sell the goods they are best at producing.

supply shocks

Events that fundamentally reduce society's ability to produce goods and services are called demand shocks recessions supply shocks

Fixed investment

Expenditures on physical plants and equipment, which are then used to produce other goods, are referred to as ___________. Intermediate goods Fixed investment Inventory investment Consumer durables

true false

GDP fails to account for economic "bads" like pollution. true false GDP reflects the distribution of income and thus adequately reveals income inequality. true false

Nominal GDP

GDP for a given year valued in that year's prices is called Per capita GDP Nominal GDP Real GDP Adjusted GDP

false

GDP is used to assess the performance of an economy; however, it is not a perfect measure of economic performance. What are some of the problems with using GDP to measure the performance of an economy? The omission of the underground economy can cause GDP to be overstated true false

Bottles of Coca − Cola.

Give an example of a U.S. export that is a consumer nondurable good. Samsung Galaxy 6 Smartphone. General Electric washing machine. A case of German beer. Bottles of Coca − Cola.

Pro Pro

Given all the problems in using GDP as a measure of performance of an economy, why is it still widely used to measure both the economy's performance and as an indicator of standard of living? GDP provides a summary measure of an economy's performance. Pro Con There is a strong correlation between GDP and important life outcomes. Pro Con

decreases government spending

Government faces a budget deficit, so it decreases increases spending and net exports consumption government spending investments falls.

Both 1) and 2) are true.

Health experts note that Neither 1) nor 2) is true. 2) As countries get richer, life expectancy increases 1) As countries get richer, infant mortality decreases Both 1) and 2) are true.

true false

Household production is included in GDP. true false If GDP included the value of leisure, then measured GDP would increase. true false

Physical

Human Physical capital consists of assets like machines, buildings, computers, and other tangible items.

Human

Human Physical capital is the knowledge and skills that people bring to the workplace.

supply shock.

Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico in 2005. This drove up the prices of natural gas, gasoline, and heating oil. This is an example of a negative externality. supply shock. depression. demand shock.

2008

If an automobile is produced by Chevrolet in 2008 but is not sold until 2010, the automobile is included in which year's GDP? 2008 Both 2008 and 2010 2010 2009 − the average of the two

it may be possible for nominal GDP to increase.

If the quantity of goods and services produced in an economy decreases, real GDP will certainly increase. it may be possible for nominal GDP to increase. nominal GDP will certainly decrease. it may be possible for real GDP to increase.

Greece looker poorer relative to Japan than it really is

In Japan, real GDP per capita is higher than it is in Greece. However, people in Japan work much longer hours than people in Greece. This disparity in work hours suggests that The real GDP per capita numbers accurately capture the well-being of Greece and Japan Greece looker poorer relative to Japan than it really is Greece looks richer relative to Japan than it really is

Society is poorer than GDP numbers suggest

In places where production causes a great deal of pollution, ____________. GDP numbers accurately measure society's well-being Society is poorer than GDP numbers suggest Society is richer than GDP numbers suggest

decreases consumption

Income taxes increase, which increases decreases consumers' disposable incomes, so net exports consumption government spending investments falls.

False: Even small growth rates—say, as little as 2% sustained over time, can result in large increases in real GDP.

Indicate whether the following statement is true or false: "Over long time horizons, small differences in economic growth between countries lead to correspondingly small differences in standard of living." False: Even small growth rates—say, as little as 2% sustained over time, can result in large increases in real GDP. True: If countries want to increase their well-being, they must experience growth at a rapid and aggressive pace. False: Growth rates are not related to standard of living. True: A country would require a growth rate of at least 10% in order to experience an increase in living standards.

increases investments

Interest rates increase, which decreases increases the cost of borrowing, so government spending investments net exports primarily falls.

Intermediate goods

Investment goods Intermediate goods are goods used as inputs in the production of a different final good

Investment goods

Investment goods Intermediate goods are the plant, machinery, or equipment that will be used to produce more goods or services.

Yes, it adjusts for rising prices so that a change in real GDP represents a true change in an economy's production.

Is real GDP a better indicator of economic progress than nominal GDP? Yes, it adjusts for rising prices so that a change in real GDP represents a true change in an economy's production. No, nominal GDP measures output at current market prices, so it is a better determinant of economic well-being. No, since nominal GDP filters out the effects of rising prices, it can reveal true changes in an economy's production. Yes, by measuring current production at current prices, it can better determine the material well-being of a country.

Con Pro Con

It measures income but not equality. Pro Con GDP is an objective measure of economic performance. Pro Con GDP measures only legitimate market transactions. Pro Con

economic growth, the unemployment rate, and inflation.

Macroeconomics includes the study of industry sales, corporate growth, and home prices. decisions made by individuals, businesses, and governments. product demand, product supply, and profit maximization. economic growth, the unemployment rate, and inflation.

more productive; hinders economic growth

Physical capital makes workers ________, so a declining capital stock ________. more productive; hinders economic growth less productive; helps an economy grow more productive; helps an economy grow less productive; hinders economic growth

intermediate goods

Raw materials or components that will eventually be transformed into a finished product are called ________. intermediate goods consumer durables inventory investment

fewer choices over how they spend their time.

Research conducted by Justin Wolfers and Betsey Stevenson shows that as GDP increased, respondents reported all of the following except less physical pain and depression. being treated with greater respect. fewer choices over how they spend their time. more general enjoyment.

Nominal GDP increases and real GDP is unchanged

Suppose that between the years 2524 and 2525, U.S. production remains unchanged but prices increase by 6%. Then Nominal GDP increases and real GDP decreases Nominal GDP increases and real GDP increases Nominal GDP is unchanged and real GDP increases Nominal GDP increases and real GDP is unchanged

32

Suppose that in the economy of Tilden, real GDP per capita grows at 10%, doubling every 7 years. In 35 years, the typical resident of Tilden will be ________ times as rich as the typical resident today. 10 32 2 5

False: The NBER uses GDP, but it also uses a wide range of economic factors to assess the health of the economy.

The NBER uses only GDP to determine whether we are in a recession." Is this statement true or false? Explain your answer. True: The NBER only uses GDP because it is objective, easy to measure, and highly correlated with life outcomes. False: The NBER doesn't use GDP at all; it prefers to use other useful economic indicators to assess the economy. False: The NBER uses GDP, but it also uses a wide range of economic factors to assess the health of the economy. Uncertain: It depends on the current NBER members and their preferred method of determining a recession.

Underground economy

The ___________ is what economists call unreported but wealth-creating transactions, collectively, that are not included in GDP. Underground economy Formal economy Illicit transaction

income approach

The ___________________ to calculating GDP adds up wages, rents, and profits to determine GDP. income approach factor approach expenditures approach

real GDP per capita

The best measure of a country's standard of living discussed in this chapter is nominal GDP real GDP per capita adjusted GDP

Are most open to international trade

The countries that have experienced the most rapid economic growth are the countries that ____________. Close their borders and reserve the domestic market for domestic producers Export primary products like coal while importing high-tech products like iPods Are most open to international trade None of the other choices are true.

70/3.5 = 20

The economy of Paulonia grows at 3.5% per year. How many years will it take for real GDP in Paulonia to double? 2 35 70 20

It provides a common denominator to add up the value of everything the economy produces into one piece of data.

The goal of GDP is to measure a country's overall production of goods and services. Why do we quote GDP in terms of dollars rather than in terms of physical goods? If we quoted GDP in terms of physical goods, it would overestimate the true value of GDP. It provides a common denominator to add up the value of everything the economy produces into one piece of data. If we quoted GDP in terms of physical goods, then the intermediate goods would be counted twice. All else equal, people are likely to work harder and work more when they see GDP expressed in dollar terms.

Investment (I): College tuition is an investment in human capital, which will increase productivity over a lifetime.

The money you spend on college tuition is included in the consumption category of expenditures. Can you make an argument that it should be counted elsewhere in GDP? Explain. Investment (I): College tuition is an investment in human capital, which will increase productivity over a lifetime. Net exports (NX): Colleges sell education to domestic and foreign students so it should be counted in net exports. All of the other answers are correct. Government spending (G): Government spends money to build schools, pay teachers, and fund education.

increased government regulations on businesses.

The size of the underground economy would tend to increase if the government of a country legalized prostitution. increased government regulations on businesses. lowered the legal drinking age from 21 to 18. decreased income tax rates.

U.S. GDP stays the same and French GDP increases

When Josie, a U.S. resident, buys an imported bottle of wine from France, U.S. GDP decreases and French GDP increases Both U.S. and French GDP increase U.S. GDP stays the same and French GDP increases U.S. GDP increases but French GDP stays the same

Consumption: Consumers responded to lower housing wealth by reducing their consumption spending.

When the housing bubble popped in 2007, it caused home prices to fall by up to 40%. Did this shock affect consumption, investment, government expenditures, or net exports? Investment: As home values fell, consumer demand for cheaper homes increased, which increased investment. Consumption: Consumers responded to lower housing wealth by reducing their consumption spending. Government expenditures: As people's wealth evaporated, government increased its spending on transfer payments. Net exports: As the economy weakened, fewer Americans purchased products from abroad and net exports fell.

$3975

When the transactions of the underground economy are included, GDP per capita in Cambodia is $__________

All of the other answers positively affect countries' growth

Which of the following has been shown to positively affect countries' economic growth? A more educated workforce All of the other answers positively affect countries' growth A large stock of physical capital Government that establishes and protects property rights

social security payments to retirees

Which of the following is not considered part of government spending? teachers' salaries paid by a local government a nature preserve purchased by a state government social security payments to retirees a military jet purchased by the federal government

Most of the world's economic growth has taken place in the past 300 years.

Which of the following statements best captures the story of the world's economic growth? People in 1900 lived little different than people in the year 1000. The world's most developed countries experienced large spurts of growth that catapulted them to wealth. Most of the world's economic growth has taken place in the past 300 years. Most of the world's wealthy economies have had slow and sustained growth for the last 200 years.

The more physical and human capital a country's labor force has, the higher its economic growth is likely to be.

Which of the following statements is true? Economic growth depends more on competition and trade than on the accumulation of physical and human capital. The more physical and human capital a country's labor force has, the higher its economic growth is likely to be. A country with more physical capital produces more output than a country with more human capital. There is no correlation between the amount of physical and human capital that a country possesses and its GDP

General Electric purchases a machine that will be used to produce LED light bulbs

Which of the following transactions is included in the current calculation of U.S. GDP? General Electric purchases a machine that will be used to produce LED light bulbs General Motors builds a pickup truck at a manufacturing facility in Brazil General Mills buys oats to make Cheerios General Colin Powell purchases a Victorian-era mansion from former Vice President Al Gore

Aunt Matilda buys a new convection oven for her condo in Boca Raton.

Which of the following transactions represents the purchase of a final good or service? Aunt Matilda buys a new convection oven for her condo in Boca Raton. Dunkin' Donuts purchases coffee beans. Tiffany's buys platinum wire to use in the production of its necklaces. General Motors purchases tires from Goodyear to install on its new Chevy Suburbans.

The National Bureau of Economic Research

Who declares when the U.S. economy officially enters a recession? The Bureau of Economic Analysis The Department of Commerce The president of the United States The National Bureau of Economic Research

The value of the intermediate good is already included in the market price of the final good sold to buyers.

Why don't economists include the sale of intermediate goods and services in the calculation of GDP? Whether or not intermediate goods are included in GDP depends on the method being used to calculate GDP. it would be difficult, if not impossible, to calculate the value of every single item used to produce the final good. It eliminates the possibility of including any goods in the calculation of GDP produced this year and sold next year. The value of the intermediate good is already included in the market price of the final good sold to buyers.

Gross domestic product

____ is the market value of all final goods and services produced in a country in a given year. Adjusted GDP Gross domestic product Per capita GDP

Rents; profits; wages

_____ are income earned by landlords, ______________ are income earned by business owners, and ________ are income earned by workers. Rents; profits; wages Rents; wages; profits Wages; profits, rents Profits; rents; wages

Demand

_____ shocks arise spontaneously and unpredictably, often as a result of changes in the confidence consumers and businesses have about the economy. Supply Real Demand Energy

Net exports

______ are the sum of the goods produced in America and sold abroad, minus the goods and services that were produced abroad but purchased in America. Consumer durables Net exports Net imports

Investment expenditures

______ include spending by businesses on factories, tools, and research and development. Business durables Investment expenditures Intermediate expenditures

Microeconomics

______ is the study of decisions made by individuals, businesses, and other entities such as governments. Microeconomics Econometrics Macroeconomics

Real GDP

______ measures the output of final goods in a country in a given year, valued at a particular base year's prices. Real GDP Nominal GDP Per capita GDP

microeconomics

is the study of one market at a time. macroeconomics microeconomics

macroeconomics

the study of the economy as a whole macroeconomics microeconomics