Chapter 5-10
Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $15 trillion in base year dollars, and the long-run equilibrium price level (in index number form) is 108. The corresponding full employment level of nominal GDP must be $___ trillion dollars
16.2
The percentage of total expenditures paid by the consumers of these devices is ____%.
17
If the average annual rate of economic growth is 4 percent, approximately how long will it take for the nation's per capita real GDP to double?
17.5 years
The world's population is growing at a rate of about
2 people per second
Between the start of 2021 and the start of 2022, a country's economic growth rate was 4 percent. Its population did not change during the year, nor did its price level. The rate of increase of the country's nominal GDP during this one-year interval is
4%
Bill lends Joann $1,000 for a year at a nominal interest rate of 7%. If both Bill and Joann expect the inflation rate to be 3% next year, then the real rate of interest is
4%
Suppose that the current price of a tablet device is $300 and that people are buying 1 million tablets per year. The government decides to begin subsidizing the purchase of new tablet devices. The government believes that the appropriate price is $260 per tablet, so the program offers to send people cash for the difference between $260 and whatever the people pay for each tablet they buy. If no consumers change their tablet-buying behavior, this program will cost the taxpayers ____ million.
40
The total 2002 US employment status of the non-institutional adult population is depicted in the figure on the right. It is measured in millions of workers and as a percentage. According to the labor data in the pie chart, the unemployment rate, the labor force, and the labor force participation rate are:
5.78%, 144.87, 66.58%
The total 2003 US employment status of the non-institutional adult population is depicted in the figure on the right. It is measured in millions of workers and as a percentage. According to the labor data in the pie chart, the unemployment rate, the labor force, and the labor force participation rate are:
5.99%, 146.51, 66.24%
Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, this program will cost the taxpayers ____ million.
60
Following the expansion of the State Care program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is ____%.
83
Suppose that in year 1 nominal GDP for a country is $5,200 billion. The GDP price index is 114.1, and the population is 100 million. In year 1, the real wage averages $18 per hour and workers work 35 hours per week. In year 2, this country's nominal GDP is $6,000 billion. The GDP price index is 114.2, and the population is now 105 million. Assume that in year 2 the real wage averages $18 per hour and workers work 35 hours per week. Calculate this nation's growth rate of real GDP per capita from year 1 to year 2.
9.8 percent
Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to $320, this program will cost the taxpayers ____ million.
90
Which of the following statements is true?
A higher saving rate allows us to invest in our capital stock and results in economic growth.
Which of the following is not a key feature shared by nations that attain higher levels of economic development?
A large presence of military personnel to ensure that the government's views are supported
Using the expenditures approach to national income accounting, which of the following would be counted as investment spending?
A person in California buys a new house.
Which of the following statements is false?
A society that wants more in the future should consume more of its capital today.
Which of the following is the definition of the PCE Index?
A statistical measure of average prices using annually updated weights based on surveys of consumer spending.
Many economists suggest that our nation's legal system is an example of a public good. Which of the key properties of a public good does the legal system satisfy?
A. Nonrival in consumption; the legal system can be jointly used by many individuals simultaneously at no additional cost and with no reduction in quality or quantity. B. Nonexcludable in consumption; no one who fails to help pay for the legal system can be denied the benefit of the system. *BOTH A AND B!!*
Subsidizing medical services through Medicare
A. makes medical services available to a large percentage of the population, who otherwise could not afford them. B. drives a wedge between the price received by providers and the price perceived by consumers. E. ONLY A AND B ARE TRUE!!**
In a simple economy with only businesses and households, suppose that the sum total of all the goods and services produced during the relevant period—pairs of shoes, candy bars, digital devices, etc. all summed together—is 560 trillion units. The total dollar value of this flow of output is $50 trillion. The total amount of factors of production—labor, land, capital, entrepreneurship, all summed together—is 0.5 billion units. What is the flow of income—that is, the sum of wages, rents, interest, and profits? The flow of income—the sum of wages, rents, interest and profits—is
$50 trillion.
Suppose real GDP for a country is $1,400 billion. The GDP price index is 114.9. There are 28 million workers who work 36 hours per week, and the real wage averages $15 per hour. What is labor productivity for this country?
$50,000
The unemployment rate is calculated as
(# of ppl unemployed / # of ppl in labor force) x 100
A price index is computed as
(cost of market basket today÷cost of market basket in base year)×100.
Total income can be viewed as the sum of
*all of the above*
Which of the following equations is correct?
- GDP − depreciation = NDP - NDP = C + I + G + X − depreciation - GDP = C + netI + G + X + depreciation ***All of the above equations are correct!!!
Which of the following resource endowments have earned Iceland the ranking as the best location in the world in which to locate data centers?
- cold climate - geothermal steam
Gross Domestic Product
- does not include transfer payments or financial transactions. - only includes "final" goods and services to avoid double counting. - does not include the transfer of second-hand goods. *All of the above!!!*
Limiting the immigration of highly educated professionals hurts U.S. economic growth because
- it restricts the supply of high human capital workers and the new ideas they could potentially generate. - it restricts the knowledge base of the workforce. **both a and b
The flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period because
1. profit is defined as what is left over from total business receipts after all other costs—wages, rents, interest—have been paid. 2. spending by one group is income to another. **both are correct!!**
The dollar amount of the increase in total expenditures on blood pressure monitoring devices in this state following the expansion in the State Care program is $___ million.
1.4
Suppose that the full employment level of nominal GDP rises in one year from $16.2 to $17.8 trillion. The long-run equilibrium price level, however, remains unchanged at 108. By how much (in real dollars) has the long-run aggregate supply curve shifted to the right from one year to the next? $___ trillion. By how much, if any, has the aggregate demand curve shifted to the right?
1.48 AD has shifted exactly by $1.48 trillion.
Suppose that, as part of an expansion of its State Care health system, a state government decides to offer a $50 subsidy to all people who, according to their physicians, should have their own blood pressure monitoring devices. Prior to this governmental decision, the market clearing price of blood pressure monitoring devices in this state was $50, and the equilibrium quantity purchased was 20,000 per year. After the government expands its State Care plan, people in this state desire to purchase 40,000 devices each year. Manufacturers of blood pressure monitoring devices are willing to provide 40,000 devices at a price of $60 per device. In this case the out-of-pocket price each consumer pays for a blood pressure monitoring device is $
10
If last year a pineapple cost $2, and this year it costs $4, there has been a ________ percent rise in the price of the pineapple over a one-year period.
100
Jim's favorite breakfast is two eggs, 1/5 lb. of bacon, 1/7 lb. of white toast, 1/6 can (16 ounce can) of frozen concentrate orange juice, and 1 lb. of grapefruit. The following table contains 1991 and 2001 prices for these five items. Using 1991 as the base year, compute the price index for Jim's breakfast for 2001.
107.5
In the decision making process for markets and the public sector
A. the market system is run by proportional voting rules and the public sector is run by majority rule. B. dollars spent count as votes in the market system, but in the public sector one person gets one vote. C. the spending of dollars can indicate intensity of want, but political voting does not. **D. All of the above!!**
Suppose that the full employment level of nominal GDP rises in one year from $16.8 to $18.0 trillion. The long-run equilibrium price level, however, remains unchanged at 120. By how much (in real dollars) has the long-run aggregate supply curve shifted to the right from one year to the next? By how much, if any, has the aggregate demand curve shifted to the right?
AD has shifted exactly by $1.00 trillion
Which of the following is a true statement about comparing world incomes?
Adjusting world incomes for purchasing power gives a more accurate view than using market foreign exchange rates.
Which of the following statements is true?
Annual U.S. inflation rates rose considerably during the 1970s but declined to lower levels after the 1980s.
Which of the following is a correct explanation for why the aggregate demand curve slopes downward?
As the price level decreases, the real value of cash balances increases,and total expenditures rise.
Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that
Canada is able to free-ride on the defense spending of the United States.
What is economic growth?
Economic growth is increases in per capita real GDP measured by its rate of change per year.
Suppose that during the past 3 years, equilibrium real GDP in a country rose steadily, from $430 billion to $480 billion, but even though the position of its aggregate demand curve remained unchanged, its equilibrium price level steadily declined, from 108 to 101. What could have accounted for these outcomes, and what is the term for the change in the price level experienced by this country?
Economic growth without an increase in aggregate demand; secular deflation
Which of the following is not a true statement about the impact of immigration on economic growth?
Economists agree that population growth through immigration is a drain on the economy because it lowers per capita GDP.
Assume that the position of a nation's aggregate demand curve has not changed, but the long-run equilibrium price level has declined. Now consider the following factors: Factors a. An increase in labor productivity b .A decrease in the capital stock c. A decrease in the quantity of money in circulation d. The discovery of new mineral resources used to produce various goods e. A technological improvement Other things being equal, which of these factors might account for this event?
Factors a, d, and e.
Suppose that the position of a nation's long-run aggregate supply (LRAS) curve has not changed, but its long-run equilibrium price level has increased. FACTOR a. A rise in the value of the domestic currency relative to other world currencies b. An increase in the quantity of money in circulation c. An increase in the labor force participation rate d. A decrease in taxes e. A rise in real incomes of countries that are key trading partners of this nation f. Increased long-run economic growth Of the factors given above, which could account for the price level increase with constant LRAS?
Factors b, d, and e.
(T/F) Real standards of living can only go up with positive economic growth.
False
(T/F) A change in the price level has no effect on the real value of cash balances.
False
(T/F) An effluent fee refers to a government regulation which specifies a maximum allowable rate of pollution.
False
(T/F) An increase in the price level shifts the aggregate demand curve (AD) to the left.
False
(T/F) An increase in long-run aggregate supply cuases the price level to increase, and is therefore inflationary.
False
(T/F) An innovation is the same thing as an invention.
False
(T/F) As nations become richer, average family size increases.
False
(T/F) In the United States, a patent gives the inventor of a product the exclusive right to make, use, or sell the product for 50 years.
False
(T/F) Market failure refers to a situation where a market economy collapses.
False
(T/F) The aggregate demand curve is essentially the same as the demand curve for an individual product.
False
(T/F) The most common provider of public goods is the private sector.
False
(T/F) Transfer payments are money payments made by governments in exchange for goods or services.
False
(T/F) Whenever inflation rates are overestimated for the life of a loan, creditors lose and debtors gain. If you invest $1,000 in a savings account that pays 2 percent annually, your $1,000 investment will have gained the most purchasing power in one year if the inflation rate is
False 1 percent
(T/F) The services provided by state parks are public goods.
False, because many services commonly offered by state parks are subject to the principle of rival consumption.
(T/F) Government expenditures on Medicare have routinely turned out to be lower than the expenditures forecast at the time the program was put in place.
False.
A true public good must be provided by the government. Which of the following goods provided by the government is a true public good?
Flood control.
According to the circular flow of income and output, which of the following is not true?
Goods, services and money all flow in one direction since money pays for the goods and services.
Which of the following is not a difference between market and collective decision making?
Government goods are costless to produce, while private goods have production costs.
Which of the following factors could cause the economy to experience supply-side inflation?
Government laws which say that the average work week must be reduced by one hour every year.
Which of the following will shift the aggregate demand curve to the left?
Government spending falls as legislators try to balance the budget.
Which of the following will generate an increase in aggregate demand?
Government spending for the onset of a war.
Which of the following events would cause a movement down along the LRAS curve, other things being equal?
Government spending has decreased.
Which of the following is not an economic function of the government?
Income redistribution.
Which of the following is not an economic function of government?
Income redistribution.
Which of the following will shift the aggregate demand curve to the left?
Interest rates rise
Invention and innovation are not the same thing. ___ are useless until ____ transforms them into goods and services that people find valuable.
Inventions innovation
The French government recently allocated the equivalent of more than $120 million in public funds to Quaero (Latin for "I search"), an Internet search engine analogous to Google or Yahoo. Is a publicly funded Internet search engine a public good or a government sponsored good?
It is a government sponsored good, deemed socially desirable through the political process.
What effect does immigration have on a nation's per capita GDP?
It may increase or decrease per capita GDP depending on the number of immigrants and their skills.
What types of policies might Brazil implement to improve its growth prospects?
It should implement programs narrowly focused on promoting a higher literacy rate and broadly focused on a greater average educational attainment by its residents.
According to the graph, which country had the lowest unemployment rate over the longest period during the years 1993-2004?
Japan.
Which of the following will increase labor productivity?
Labor has more physical capital to work with.
Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level.
Long-run aggregate supply schedule (LRAS) shifts to the left and aggregate demand schedule (AD) shifts to the left by an equal amount.
The most important categories in the federal budget are
Medicare and other health-related spending, Social Security and other income-security programs, and national defense.
Which one of the following is not a component of total expenditures?
Merchandise inventories.
Using the expenditures approach to national income accounting, which of the following would be counted as net exports?
Microsoft sells software to British companies.
The values of NGDP for the years 1981 and 1982 are $3.1284 and $3.255 trillion, respectively. The values for RGDP for 1981 and 1982 are $5.2917 and $5.1893 trillion, respectively. According to the graph of NGDP and RGDP and the values of the two time series variables for 1981 and 1982, it is correct to state that
NGDP has always been increasing, but RGDP has been both increasing and decreasing. Between 1981 and 1982, NGDP increased by $.1266 trillion, corresponding to a rate of growth of 4.05%. RGDP decreased by $.1024 trillion, corresponding to a negative rate of growth of 1.94%.
Which of the following transactions would not be included in GDP?
Nancy mows her own lawn.
____theory argues that the greater the rewards, the more rapid the pace of technology. And greater rewards spur research and development.
New theory
Does an Internet search engine satisfy the key characteristics of a public good?
No, it has the characteristic of non−rivalrous consumption, but advertisers can be excluded and be made to pay.
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.
Which of these price indices shows the greatest price volatility?
PPI.
Which one of the following is a primary difference between a public good and a private good?
Private goods are subject to the principle of rival consumption while public goods are not.
Which of the following statements is not true?
Property rights encourage people to take fewer risks, making the economy more secure.
Which of the following is not a political function of the government that leads to involvement in the economy?
Public goods.
Note that the chain-weighted GDP is a measure of GDP that the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce calculates by continuously updating the weights of the various components of GDP to reflect changes in the relative prices and shares of the various components of GDP. According to the graph,
RGDP has increased and decreased.
In many countries, education is either wholly provided by the government or is heavily subsidized. How would an economist explain this?
Since education has a spillover benefit, private markets will under provide for it.
Brazil has a population of about 210 million, with about 150 million over the age of 15. Of these, an estimated 25 percent, or 37.5 million people, are functionally illiterate. The typical literate individual reads only about two nonacademic books per year, which is less than half the number read by the typical literate U.S. or European resident. Answer the following questions solely from the perspective of new growth theory: a. Which of the following best explains the implications of Brazil's literacy and reading rates for its growth prospects in light of the key tenets of new growth theory.
Since the development of human capital is an important determinant of economic growth, Brazil's literacy and reading rates suggests its potential economic growth rate is lower.
Why are politicians and economists concerned about the economic growth rate in the U.S.?
Small differences in the rate of economic growth can make large differences in the standard of living over time.
Which of the following is an example of a transfer payment?
Social Security.
The two primary money transfer payments in our system are
Social Security old-age and disability benefits and unemployment insurance benefits.
Which of the following is not a source of funding available to governments?
Stock sales.
The table on the right shows four major price indices of the US economy: the Consumer Price Index (CPI), the Producer Price Index (PPI), the Personal Consumption Expenditure Index (PCE) and the GDP deflator. All four indices are used to measure inflation. Based on the data from the four indices in the table, which price index suggests the highest rate of inflation between the years 1995 and 1996?
The CPI indicating the highest inflation rate (2.94%).
The table on the right shows four major price indices of the US economy: the Consumer Price Index (CPI), the Producer Price Index (PPI), the Personal Consumption Expenditure Index (PCE) and the GDP deflator. All four indices are used to measure inflation. Based on the data from the four indices in the table, which price index suggests the highest rate of inflation between the years 2000 and 2004, and between 1998 and 1999. What were the corresponding rates suggested by these indices?
The PPI indicating the highest inflation rate of 10.5% for 2000-2004; the CPI indicating the highest inflation rate of 2.19% for 1998-1999.
Which of the following is the definition of personal income (PI)?
The amount of income that households receive before paying taxes.
Consider the figure to the right showing the long-run aggregate supply (LRAS) and the aggregate demand (AD) curves. Suppose that the long-run aggregate supply curve moves to a GDP level of $35 billion. Which of the following is true?
The equilibrium price level will decrease, and equilibrium GDP will increase.
Which of the following statements is true concerning the historical picture of business activity in the United States?
The frequency and size of fluctuations around the trend has decreased since World War II.
What determines the total value of annual U.S. GDP?
The spending and production decisions of consumers, firms, governments, and foreigners.
Which of the following events would cause a rightward shift of the AD curve, other things being equal?
There has been a decline in foreign exchange value of the nation's currency.
Which of the following events would cause a movement up along the LRAS curve, other things being equal?
There has been an 8 percent increase in the quantity of money in circulation.
____ are payments made to individuals for which no services or goods are rendered in return, compared with ____ which people must direct to spending on specified goods.
Transfer payments income transfers in kind
(T/F) According to economist Paul Romer, ideas are what drive economic growth.
True
(T/F) According to new growth theory, more technological advances will occur when the rewards are greater.
True
(T/F) Consumer sovereignty means that consumers have the individual freedom to decide what they wish to purchase.
True
(T/F) In an open economy, the total value of GDP is based on the spending decisions of individuals, firms, governments, and foreign residents.
True
(T/F) In general, the more securely private property rights are assigned, the more capital accumulation there will be.
True
(T/F) Much of our legal system is involved with defining and protecting property rights.
True
(T/F) On a national basis, higher saving rates eventually mean higher living standards in the long run, all other things held constant.
True
(T/F) Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the long-run aggregate supply curve.
True
(T/F) Population growth can have both a positive and a negative impact on economic growth.
True
(T/F) The goal of antitrust legislation is to reduce the power of firms that can determine the market price of the goods they sell.
True
(T/F) The lower the price level, the greater the total planned spending on goods and services.
True
(T/F) The provision of public education is at least in part an attempt to redistribute income by making sure that the poor have access to education.
True
(T/F) There are predictions that computers may become as powerful as the human brain by 2030.
True
(T/F) The long-run aggregate supply curve (LRAS) is equivalent to the full-employment level of real GDP.
True
(T/F) The components of GDP as calculated using the expenditure approach are identical to the components of aggregate demand.
True.
Which of the following helps to explain why the aggregate demand curve slopes downward?
When the price level rises, the real value of financial assets (like bonds, and savings account balances) declines.
Can real standards of living go up without any positive economic growth?
Yes, if individuals are, on average, enjoying more leisure by working fewer hours but producing as much as they did before.
All of the following are goals established by the Full-Employment Act of 1946 except
a balanced budget.
An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to
a decrease in the price level and an increase in output.
The aggregate demand curve would shift to the right as a result of
a drop in the foreign exchange value of the dollar.
Internet job sites, like Monster.com, have led potential employees to find jobs via the internet almost instantly. This has caused
a fall in frictional unemployment.
A good that has been deemed socially desirable through the political process is known as
a merit good.
Entrepreneurship functions better when
a system of private property rights permits entrepreneurs to capture the rewards from their entrepreneurial activities.
The expenditure approach to tabulating GDP
adds up the total amount spent on newly produced domestic goods and services during the year.
The total of all planned real expenditures in the economy is
aggregate demand
The development of modern rich nations can be characterized by three stages:
agricultural stage, followed by manufacturing stage, and lastly the tertiary stage.
For modern, rich nations, the three stages of development (in order of occurrence) are
agriculture, manufacturing, and services.
According to the interest rate effect, an increase in the price level
all of the above
Consider the accompanying diagram when answering the questions that follow. Suppose that the current price level is P2. In this case, the price will fall toward P1because
all of the above
Consider the accompanying diagram when answering the questions that follow. Suppose that the current price level is P3. In this case, the price will rise toward P1because
all of the above
Economic growth as it is currently measured
all of the above
Government enforced property rights are crucial to economic growth because they
all of the above
The long-run aggregate supply curve can shift to the right due to
all of the above
Which of the following factors are highly related to the pace of economic development?
all of the above
Pollution produced by a factory is being dumped into a local river. The community uses local funds to clean the river. This is an example of
an external cost as the community, not the factory, is paying for the clean up.
Most private goods ________ rival in consumption, and most public goods ________ rival in consumption.
are; are not
Year to year rightward shifts in long-run aggregate supply leads to
a long-run trend path for real GDP.
Public schools provide educational services at a price
below the market price.
The ____of economic growth are reductions in illiteracy, poverty, and illness and increases in life spans and political stability. The ____of economic growth may include environmental pollution, alienation, and urban congestion.
benefits costs
External ____ result in an underallocation of resources to the specific activity. Three possible government corrections are ____ the production of the activity, ____ private firms or consumers to engage in the activity, and ____.
benefits financing subsidizing regulation
Why is innovation, such as developing new product colors, a fundamental contributor to economic growth? If new shades of color can be rendered using the smallest feasible set of organic chemicals, it would
boost productivity in transmitting colors to new products and, eventually, contribute to higher economic growth.
We draw the long-run aggregate supply curve as a vertical line to reflect the fact that
changes in the price level do not alter the level of potential real output.
Differences in decision making between the private and public sectors include all of the following except
competition.
Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the U.S. government except
consumers of Medicare tend to only consume the high valued medical services.
Total expenditures for domestically produced goods and services consist of
consumer spending, business spending, government spending, and net foreign spending.
External ___ lead to an overallocation of resources to the specific economic activity. Two possible ways of correcting these spillovers are ___ and ____.
costs taxation regulation
Mandy has been temporarily laid off during a recession, but expects to be rehired when business picks up. Which type of unemployment is this?
cyclical unemployment
Consider an economy where the natural rate of unemployment is equal to 3%. If the actual unemployment rate is equal to 7%, then
cyclical unemployment rate is 4%
Suppose that there is a sudden rise in the price level. As a consequence, economywide planned spending on purchases of goods and services will ____.
decrease
Supply-side inflation can be caused by a continual
decrease in aggregate supply while aggregate demand remains unchanged.
Inflation can be caused by
decreases in the long-run aggregate supply curve or increases in the aggregate demand curve.
Labor productivity is normally measured by
dividing total real domestic output by the number of workers or by the number of labor hours.
When the price level falls, these three effects work together to generate ____ movements along the economy's aggregate demand curve.
downward
The shape of the aggregate demand curve (AD) is
downward sloping
While some economists argue that population growth reduces ____ growth, others contend that the opposite is true. The latter economists consequently believe that immigration should be encouraged rather than discouraged.
economic
Population growth generally
encourages technological progress that increases economic growth.
A country that saves a larger percentage of GDP than another country will, ceteris paribus
experience higher rates of economic growth since there will be more investment.
The economic activities of government include (1) correcting for ___, (2) providing a ____, (3) promoting ____, (4) producing ____ goods, and (5) ensuring ____.
externalities legal system competition public economywide stability
If the actual price level increases beyond the long-run equilibrium price level, all of the following will tend to occur except
firms offering fewer services than people wish to purchase.
Developing countries should
focus on production based on comparative advantage.
Heroin, cigarettes, gambling, and cocaine are examples of
government-inhibited goods.
One set of political, or normative, activities of the government includes the provision and regulation of ____ goods and ____ goods.
government-sponsored government-inhibited
Medicare spending is ________ total employer and employee contributions.
growing much faster than
In the circular flow of income
households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms.
Increases in ____capital can lead to greater rates of economic growth. These come about by increased education, on-the-job training, and self-teaching.
human
The knowledge and skills that people in the workforce acquire through education, on-the-job training, and self-teaching is referred to as
human capital.
All of the following are ways the government can correct positive externalities except
imposing positive taxes.
Another key political function of government entails formulation of policies that bring about ____ redistribution.
income
Typically during a recession
incomes fall and unemployment rises.
If the LRAS shifts to the right over time and during this time AD does not noticeably change, real GDP will ________ and the price level will ________.
increase; decrease
Since the 1960s, public spending on education has _________, while student performance has ______________.
increased, remained constant or declined
For every 1 percent increase in the stock of research and development in the United States, productivity in the rest of the world
increases by about 0.25 percent.
In the long run, persistent deflation in a growing economy can occur if
increases in the LRAS are proportionately larger than the increases in AD.
One reason that collective and private decision making differ is
individuals working in the government sector face a different incentive structure than those in the private sector.
Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. There can be positive unemployment in this situation because
information is costly and rigidities always exist causing some types of unemployment (frictional and structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes.
The long-run aggregate supply curve
is vertical because changes in the price level have no effect on real output.
According to the new growth theory
knowledge about how to produce goods and services is an important source of economic growth.
Improvements in ___ productivity, all other things being equal, lead to ____ economic growth and higher living standards.
labor greater
Small percentage-point differences in growth rates lead to ___ differences in per capita real GDP over time.
large
Correcting negative externalities will result in a new, corrected, market supply curve that is to the
left of the initial curve. This will decrease the output level
According to Julian Simon,
legal and illegal immigrants have a positive effect on the welfare of American citizens.
Which of the functions of government below is not a normative function of government?
leggislative regulation or prohibition when negative externalities are present
To encourage economic development a country should do all of the following except
limit the amount of imports allowed in to the country.
Medicare subsidizes the consumption of medical care by the elderly, thus increasing the amount of such care consumed. People tend to purchase large amounts of ____-value, ____-cost services in publicly funded health care programs such as Medicare, because they do not directly bear the full cost of their decisions.
low high
Basic economic analysis indicates that higher subsidies for public education have widened the differential between parents' and students' relatively ____ per-unit valuations of the educational services of public schools and the ____ costs that schools incur in providing those services.
low higher
The political system is run by ____ rule, whereas the market system is run by ____ rule.
majority proportional
Consider a nation with a government that does not provide people with property rights for a number of items and that fails to enforce the property rights it does assign for remaining items. Externalities would be ____ common in this nation than in a country such as the United States.
more
Which of the following is a common example of a government-sponsored good?
museums
The ____ rate of unemployment occurs at the long-run level of real GDP per year given by the position of the LRAS.
natural
The World Bank estimates that _______ of the world's people live on less than $2.00 per day.
nearly 10 percent
a nation's capital goods wear out over time, so a portion of its capital goods become unusable every year. Last year, its residents decided to produce no capital goods. It has experienced no growth in its population or in the amounts of other productive resources during the past year. In addition, the nation's technology and resource productivity have remained unchanged during the past year. The nation's economic growth rate for the current year will be
negative
According to ____ theory, economic growth can continue as long as we keep coming up with new ideas.
new growth
Which of the following is a characteristic of a public good?
no individual can be excluded from the benefits of consuming it
The problem with using foreign exchange rates to convert one country's GDP into dollars is that
not all goods and services are sold on world markets.
The idea that higher price levels in the United States result in foreign residents desiring to buy fewer U.S.-made goods and U.S. residents desiring to buy more foreign-made goods is referred to as the
open economy effect.
Public goods have two characteristics: (1) Once they are produced, there is no additional ____ ____ when additional consumers use them, because your use of a public good does not deprive others of its simultaneous use; and (2) consumers cannot conveniently be ____ on the basis of use.
opportunity cost charged
As in private markets, ____ and ____ have incentive effects that influence public-sector decision making. In contrast to private market situations, however, there is not a one-to-one relationship between consumption of a publicly provided good and the payment for that good.
opportunity cost competition
If nominal GDP increases, it is possible that
output has increased. prices have increased. both prices and output have increased. *any of the above might have happened*
Economic growth is represented by the long-run aggregate supply curve (LRAS) shifting
outward to the right
All of the following transactions are excluded from the measure of GDP except
paying your dentist to have your teeth cleaned.
In the absence of well-defined property rights, we would likely find
people with fewer incentives to take risks.
Economic growth can be defined as the increase in ____ real GDP, measured by its rate of change per year.
per capita
Per capita real GDP measures the amount of real GDP
per person.
The income households actually receive before they pay personal income taxes is
personal income.
Total capital is the sum of
physical capital and human capital.
All of the following would cause the aggregate demand curve to shift except
price levels change.
The economic development of a country is dependent on all of the following except
promoting protectionist barriers.
Well-defined and protected ____ rights are important for fostering entrepreneurship. In the absence of well-defined ____ rights, individuals have less incentive to take risks, and economic growth rates suffer.
property property
The economic functions of government include
providing a legal system.
Other than correcting externalities, other economic functions of government include
providing a legal system, allocating public goods, promoting competition, and stabilizing the economy.
The theory of ____ examines how voters, politicians, and other parties collectively reach decisions in the public sector of the economy.
public choice
The study of collective decision making, or the process through which voters, politicians and other interested parties influence nonmarket choices is known as
public choice theory.
When comparing per capita GDP across countries, GDP should be adjusted for
purchasing power parity.
Subsidizing medical services through Medicare
raises the price per unit of medical care received by producers.
An economy's rate of economic growth equals
rate of growth of capital plus rate of growth of labor plus rate of growth in the productivity of capital and labor.
When GDP is corrected to reflect constant dollars, this price-corrected GDP is called
real GDP.
The aggregate demand curve slopes downward because of the
real-balance, interest rate and open economy effects.
According to the real-balance effect, an increase in the price level
reduces an individual's expenditures due to a decrease in the real value of cash balances.
Suppose there is an improvement in technology. The long-run aggregate supply curve will shift to the ___ , the equilibrium price level will ___ and equilibrium GDP will ___.
right decrease increase
If labor or capital increases from year to year or if the productivity of either of these resources rises from one year to the next, the LRAS shifts ____. In a growing economy, therefore, real GDP per year gradually ____ over time.
rightward increases
The following table shows nominal GDP and an appropriate price index for a 5 year period. Using the values in the table, calculate the value of real GDP for each year. (Enter your responses as whole numbers.) The economy above has experienced
rising real gdp throughout the span of years.
The principle of ___ ___ does not apply to public goods as it does to private goods.
rival consumption
One fundamental determinant of the rate of growth is the rate of ___. To have more consumption in the future, we have to ___ rather than consume. In general, countries that have had higher rates of ____ have had higher rates of growth in per capita real GDP.
saving save saving
For economic growth to take place, a country must save. But, for saving to actually generate economic growth,
saving must be channeled into investment.
A persistent decline in the price level due to economic growth with stable aggregate demand is
secular deflation.
The aggregate demand curve
shows planned purchase rates of goods and services at various price levels.
Total income equals the dollar value of total output because
spending by one group represents income to the other group.
Which of the following is not a reason for this change in economywide planned spending?
substitution effect
Over the long run any government's fundamental revenue sources are
taxes and user charges.
The new growth theory argues that
technology must be considered a separate factor of production that is sensitive to economic incentives.
According to data shown on the graph on the right, it is clear that the labor force participation rates for men and women in the US
tended to converge over almost the entire period.
The U.S. aggregate demand curve would shift to the left if
the Federal Reserve Board caused the real interest rate to increase.
A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort and, if successful, receive larger budget allocation in future years. Another rationale for expanding the agency's activities is that this will make the jobs of its workers more interesting, which may help the agency attract better-qualified employees. Nevertheless, to broaden its legal mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In addition, to expand its activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. Part 2 The behavior of the government agency is similar to a profit-seeking private enterprise in all of the following aspects, except
the government agency depends on majority rule to enact the changes that it is seeking.
According to new growth theorists, increased population growth rates can lead to faster economic growth because
the larger the market the more incentive there is to innovate.
Market failure occurs because
the market system does not make individuals responsible for the social costs/benefits of their actions.
The theory of public choice is the study of
the process through which voters, politicians, and other interested parties interact to influence nonmarket choices.
The position of the long-run aggregate supply curve is determined by
the production possibilities curve.
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents' and students' valuations of the services provided at both private and public schools adjust to equality with the true market price of educational services. As a result of this voucher program,
the public schools will lose.
The rate of growth in the productivity of capital is 1 percent, the rate of growth of capital is 2 percent, the rate of growth of labor is 1 percent, and the rate of growth in the productivity of labor is 3 percent. From this we know that
the rate of economic growth is 7 percent.
People anticipate the inflation rate to be 8%. Banks are making loans at a 12% interest rate. Therefore,
the real rate of interest is 4% and the nominal rate is 12%.
Gross output is
the total market value of all goods and services produced during a year by factors of production located within a nation's borders, including all forms of business-to-business expenditures and thereby double counting business spending across all stages of production.
Which of the following is a dissimilarity between the market sector and the public sector decision making?
the type of voting system
Market failure occurs when
the unrestrained market economy leads to too few or too many resources going to a specific economic activity.
Consider the figure to the right. What are the three effects of decreases in the price level, and do these generate upward or downward movements along the economy's aggregate demand curve? The three effects of changes in the price level are
the real-balance effect, the interest rate effect, and the open economy effect.
Full employment means
there is a level of unemployment consistent with "normal" frictions in the labor market.
Which of the following is a similarity between the market sector and the public sector decision making?
there is an opportunity cost associated with every action
The long-run aggregate supply curve shifts outward when
there is economic growth.
The economy of Finlandia is at full employment when
there is some unemployment due to friction in the labor market, but there is no cyclical unemployment.
The long-run aggregate supply curve is determined by
the full-employment level of real output.
When the production possibilities curve shifts outward,
the long-run aggregate supply curve shifts to the right.
The simple circular flow model shows that
total income received by households must be equal to the dollar value of all goods and services produced.
The openness of a nation's economy to international ___ seems to correlate with is rate of economic growth.
trade
New growth theory differs from traditional growth theory in that
traditional theory did not explain what causes improvements in technology, but new growth theory does.
The explicit redistribution of income uses
transfer payments and income transfers in kind.
Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as
transfer payments.
All of the following are benefits of economic growth except
urban conjestion.
Similarities in decision making between the private and public sectors include all of the following except
use of force.
The shape of the long-run aggregate supply curve (LRAS) is
vertical
The long-run aggregate supply curve, LRAS, is ___ line determined by amounts of available resources such as labor and capital and by technology and resource productivity. The position of the LRAS gives the full-information and full-adjustment level of real GDP per year.
vertical
An example of free riding would be
walking on a golf course to play without paying.
The long-run equilibrium of an economy occurs
where the long-run aggregate supply curve meets the aggregate demand curve.
A government is considering two alternative plans for providing subsidy to private schools. Under the first plan it offers to let a number of students at a public school transfer to a private school under two conditions: It will transmit to the private school the same per-pupil subsidy it currently provides the public school, and the private school will be required to admit the students at a below market tuition rate. Under the second plan, the government will simply provide the students with grants to cover the current market tuition rate at the private school. ( Hint: Does it matter if schools receive payments directly from the government or from the consumers?) The outcomes of the two plans
will be different; under the first plan where a private school directly receives the subsidy, it will provide a quantity of educational services in excess of the market equilibrium quantity.
An increase in the U.S. price level can be caused by all of the following except
worsening economic conditions in Asia.
A nation's capital goods wear out over time, so a portion of its capital goods become unusable every year. Last year, its residents decided to produce no capital goods. It has experienced no growth in its population or in the amounts of other productive resources during the past year. In addition, the nation's technology and resource productivity have remained unchanged during the past year. Now, suppose that educational improvements during the past year enable the people of this nation to repair all capital goods so that they continue to function as well as new. All other factors are unchanged, however. In light of this single change to the conditions faced in this nation, this nation's economic growth rate for the current year will be
zero
In the table to the right, what is the total dollar amount that is added to the nation's gross domestic product (GDP)? Why? The total dollar amount that is added to the nation's GDP is
$0.46 because this amount equals the total value added in production.
Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level.
Long-run aggregate supply schedule (LRAS) shifts to the right and aggregate demand schedule (AD) shifts to the right by a larger amount.
An online video game has the technical capability for a large number of players to participate, as long as a game administrator works to assure constant functionality of the game. Adding any additional players deprives no other participants of the entertainment services provided by the online game. It has been easy, however, to set up a system for excluding participation by anyone who fails to contribute $5 per month to a fund that assures covering extra expenses generated by that player's participation. Is this game a public good?
No, this game is not a public good because the exclusion of nonpaying consumers is not too costly to be feasible.
Sports stadiums, museums, ballets, plays, and concerts are examples of
government-sponsored goods.
If producers have to pay external costs, the supply curve will shift to the ______, and if consumers take external benefits into account, the demand curve will shift to the ________.
left; right
The number of tablets people will buy as a result of the subsidy will be
more, on the assumption that the demand for tablet devices is downward sloping.
The nominal value of anything is its price expressed in ________, and the real value of anything is its value expressed in ________.
today's dollars; purchasing power