ECON 200 Test 3

Which of the following scenarios could lead to inflation? The population of a nation decreases. The quantity of goods and services in the economy increases by 2% while the supply of money increases by 4%. The government prints $500 million in new currency to pay off foreign debts. The supply of money decreases.

Correct: The quantity of goods and services in the economy increases by 2% while the supply of money increases by 4%. The government prints $500 million in new currency to pay off foreign debts. Incorrect: The population of a nation decreases. The supply of money decreases.

Which of the following have been proposed as solutions to the funding problem of Social Security and Medicare?

Correct: Using a different inflation adjustment for payouts. Means-testing Incorrect: Lowering the retirement age Delaying people's payment into the program

The table below lists some fictional countries. Calculate the debt-to-GDP ratio for each of them, then put them in order of their fiscal condition, worst to best. Numbers are in billions of dollars.

Divide each country's debt by its annual GDP, then multiply by 100 to obtain that country's debt-to-GDP ratio as a percentage. The country with the highest percentage comes first on the list.

If a country's nominal GDP is growing at 4.4% annually, annual inflation is running at 2.3%, and the population growth rate is 0.5%, what is the growth rate of real per capita GDP?

1.6%

If the marginal propensity to consume is 0.80, what is the total implied increase in economic spending activity from a government stimulus of $100 billion?

1/(1-.8)=500 $100 bil increased by a factor of 5

What is the approximate difference in life expectancy for people born in rich nations versus people born in poor ones?

20-25 years

Use the rule of 70 to find the approximate time required for a population to grow from 1 million people to 2 million if it is growing at a compound rate of 2.6% annually.

27 years 70/2.6 = 26.9

Assume Country X has the following statistics: Total relevant population = 50,000,000 Full-time students = 4,200,000 Not employed and not currently searching for jobs = 6,000,000 Not employed and currently searching for jobs = 2,336,000 Currently employed = 29,664,000 Country X has a labor force of -, a labor force participation rate of -, and an unemployment rate of -.

32,000,000 64% 7.3%

Last year you paid $24 for a round of golf and $12 to rent a golf cart. This year it cost you $30 to golf and $15 to rent a cart. Based on this simple basket of goods, calculate a price index for this year using last year as the base year.

45/36 x 100 = 125

Suppose that in 2014, Brazil's economic growth rate has dropped to 1.4%. Use the rule of 70 to estimate how long it would take for real per capita GDP to double.

70/x = 50 years

A country has a non-institutionalized civilian adult population of 263 million. Out of that number: 85 million are students, homemakers, retirees, etc. 11 million are discouraged workers. 122 million are employed full-time. 30 million are employed part-time. 15 million are out of work and actively looking for work. What is the unemployment rate? Round to one decimal place.

9%

Apply the appropriate label to each market situation.

A country loosens its restrictions on foreign-based land ownership. Flow of funds across national borders A nation permits private firms to compete with the state-owned mail service. Competitive markets Two countries agree to lower import tariffs on selected goods. International trade

Apply the correct label to each event. A family puts a tax rebate check into savings in the belief that tax hikes are coming and the money will be needed. A young adult enrolls in a government-sponsored driving school and saves the money she would have spent on driving instruction. Looking at the latest indicators, economists conclude that a recession began six months earlier.

A family puts a tax rebate check into savings in the belief that tax hikes are coming and the money will be needed. Savings Shift A young adult enrolls in a government-sponsored driving school and saves the money she would have spent on driving instruction. Crowding-out Looking at the latest indicators, economists conclude that a recession began six months earlier. Time lag

Both Social Security and Medicare are government programs concentrated on the - population. Social Security is focused on providing -, while Medicare provides - for retired persons. For people to receive Social Security and Medicare payments, they must have - the program when they were -. Upon -, they become eligible for payouts.

Both Social Security and Medicare are government programs concentrated on the elderly population. Social Security is focused on providing retirement income, while Medicare provides health care for retired persons. For people to receive Social Security and Medicare payments, they must have paid money into the program when they were working. Upon reaching retirement age, they become eligible for payouts.

Which developments were characteristic of the Industrial Revolution and the events leading up to it, in nations where it took hold?

Correct: A shift from agriculture to manufacturing Technological innovations A sharp upturn in real per capita GDP Legal innovations such as increased protection for private property Incorrect: Greater emphasis on environmental sustainability

Mary's costs will rise, and for revenue to keep pace she will have to - to keep her prices consistent with inflation. If Mary mistakenly believes the rising price of seafood is the result of increased -, she may misdirect restaurant resources. This would be an example of price -.

Deal with menu costs Demand Confusion

Select the correct definition of publicly held national debt

Debt held by anyone besides the federal government

Which of the following are responsibilities of the Federal Reserve?

Correct: Act as a bank for banks, both accepting deposits and extending loans. Set required reserve ratio for banks.. Apply a countercyclical economic policy to the money supply. Incorrect: Raise money for the operations of the federal government by selling bonds.

Amanda needs to buy a new car for work. She has one day to find a car and was able to read only one article about new cars before she went to the dealership. Which of the following options describe how bounded rationality is at work in this situation?

Correct: Amanda feels pressured by the time constraints on her purchase. Amanda has limited amount of information with which to make her decision. Incorrect: Amanda does not want to buy a good car. Amanda did not make an effort to gather information about new cars.

Of the six nations listed, which two hold the most U.S. debt?

Correct: China, Japan Incorrect: South Korea, Germany, India, South Africa

What are the three reasons why the CPI is hard to measure accurately?

Correct: Consumers substituting one good for another because of price Changes in the quality of the same good, over time New products to buy and new ways for consumers to buy them Incorrect: The difference between nominal and real buying power Changes in the tax rate therefore in take home income

The real GDP of Country A grew by only 1% from 2011 to 2013, while the real GDP of Country B grew by 5% during that same time span. Based on the data, what can we say definitely about the two countries?

Correct: Country B will eventually have a higher real GDP than Country A if the economy of each country continues to grow this way. Incorrect: Country B has a very high quality of life Country A's economy has been in a period of contraction Country A has a modestly high quality of life Country A has a high real GDP

Which of the following government actions would be considered fiscal policy decisions?

Correct: Cutting taxes to encourage commercial activity. Canceling a government funded project because of a lessened need for job creation. Incorrect: Stricter enforcement of immigration law The central bank acts acts to increase the money supply. Passage of new national air quality standards.

Which of the following are examples of non-market services? Taking your car to the mechanic for routine maintenance Cutting your own hair Changing the oil in your car yourself Going to the barber

Correct: Cutting your own hair Changing the oil in your car yourself Incorrect: Taking your car to the mechanic for routine maintenance Going to the barber

Which of the following statements are good assessments of the value of GDP as an economic statistic?

Correct: GDP is correlated with many measures of human welfare. Nominal GDP cannot indicate whether the economy is getting stronger or weaker. Incorrect: GDP accurately captures all economic activity. GDP does not account for goods being imported rather than locally produced.

Which of the following can be causes of frictional unemployment?

Correct: Government regulation Unemployment benefits Lack of information Incorrect: Industries shutting down due to long term changes in consumer tastes Recession

Which policy tools are considered automatic stabilizers?

Correct: Government unemployment benefits A progressive income tax structure Incorrect: Economic stimulus legislation Social Security

Which of the following may be considered as part of the consumer price index?

Correct: Housing, food, transportation Incorrect: Investments, taxes

Suppose you own a small business and have been thinking about expanding production, including hiring more workers. Until recently, interest rates at your bank have been too high for you to obtain a loan. However, the central bank decides to expand the money supply, which lowers interest rates to a level where you can take out a loan and expand production. Select the ways in which your actions affect the macroeconomy.

Correct: Investment increases Aggregate demand increases Real GDP increases Unemployment goes down Incorrect: The inflation rate goes down

Which of the following are functions of money?

Correct: It can be traded for goods and services. It has value, so owning money allows people to hold wealth. It provides a standard measure for prices to be quoted in. Incorrect: It provides individuals the opportunity to engage in barter. It requires a double coincidence of wants

What is a government budget?

Correct: It is a plan for spending government funds. It is a plan for raising funds for the government. Incorrect: It is the record of the amount of currency in circulation. It is the difference between nominal GDP and real GDP.

Which of the following statements are true about the underground economy?

Correct: It is possible for the underground economy to have an effect on the legitimate economy. It is not possible to accurately measure the size of the underground economy Incorrect: All underground economic activity os harmful to society. All of the goods and services traded in the underground economy are illegal.

Gwyn owns a furniture store. She notices prices at other furniture stores have increased dramatically over the past two years. She decides she needs to expand her output because demand must be growing. However, in order to do so, she needs to find a loan. What problems could inflation cause for Gwyn?

Correct: Lenders may be wary of providing Gwyn a loan because it is difficult to predict future price levels. Gwyn may need to spend money to update her price displays throughout the store. Gwyn might misinterpret rising prices associated with inflation for a higher demand. Incorrect: Gwyn will need to pay more capital gains taxes

Which of the following problems can inflation cause for suppliers?

Correct: Long term agreements become too risky for lenders, making it more difficult to obtain a loan. Prices begin to rise, so firms increase output Incorrect: Lower prices Higher demand

Assuming that the trends from 1980 to 2010 continue for another decade, which country would you expect to have a lower standard of living in 2020 than in 1970?

Correct: Nicaragua Incorrect: Turkey, India, Mexico

What are the causes of rising government budget deficits when expansionary fiscal policy is used during recessions?

Correct: Reduced economic activity, which means less than revenue. Increased government borrowing Incorrect: Increased borrowing by private entities Higher income tax rates

What, by consensus among economists, are the broad factors for economic growth?

Correct: Resources Institutions Technology Incorrect: Topography Language

Drag the labels to classify each category of spending as mandatory or discretionary.

Correct: Social security Medicare Food stamps Income assistance Incorrect: Defense Government employee salaries Funding for scientific research International aid

Which institutions foster economic growth?

Correct: Stable inflation rate Efficient taxes Open markets Political stability Private property rights Incorrect: Natural resources Price controls

Identify the characteristics that have enabled Singapore to become one of the world's most prosperous nations.

Correct: Strategic location High literacy rate Stable financial system Incorrect: Rich mineral deposits Strong agricultural sector Self sufficiency in regard to water food and energy

Identify all instances of technological advancement.

Correct: The automated telephone switch The assembly line Incorrect: Copyright law The 40 hour work week

Which of the following are demographic reasons why entitlement programs like Social Security make up a larger share of the federal budget now than when they were created?

Correct: The baby boomer generation will retire numbers over the next two decades. Millions more workers are eligible for payouts now than when Social security was first established. Life expectancy has increased approximately 9 years since the creation of Social Security. Incorrect: The retirement age has been lowered from 65 to 60

Two similar groups of about 300 people each took the same survey, except that the order of the questions differed for each group. One question was answered "Yes" by 75% of one group but only by 50% of the other group. What might have happened?

Correct: The difference is due to priming effects. Incorrect: The difference is due to framing effects. The difference is due to intertemporal decision making. The difference is due to status quo bias.

Expansionary fiscal policy used during economic downturns inevitably leads to a budget -. Suppose the government responds to the downturn by increasing government spending by $250 billion, but keeps tax rates the same. In this scenario, the - will rise by - $250 billion. In a recession, - falls and -rises, which means tax revenues will - even if tax rates do not change.

Expansionary fiscal policy used during economic downturns inevitably leads to a budget deficit. Suppose the government responds to the downturn by increasing government spending by $250 billion, but keeps tax rates the same. In this scenario, the deficit will rise by more than $250 billion. In a recession, income falls and unemployment rises, which means tax revenues will fall even if tax rates do not change.

Which of the following by definition directly adds to a country's GDP (gross domestic product)? Increased commercial travel Increased government borrowing Discovery of untapped oil reserves Growing population

Increased commercial travel

Why does inflation occur?

Increased money supply, relative to the supply of goods and services

The unemployment rate in Economy X when it is growing normally is 5%. When Economy X is in a recession, the unemployment rate is 10%. Drag each word or phrase to the appropriate blank space in order to complete the paragraph correctly. For Economy X, the natural rate of unemployment - 5%. This rate is not due to - factors. It applies -.

Is always Cyclical At all times

What was the centerpiece action of the Economic Stimulus Act of 2008?

It gave American taxpayers a partial rebate.

Jorge considers himself a risk-averse person. He takes the opportunity to switch to a new job where there are two possible outcomes: there is a 20% chance that he will earn $30,000 more per year than in his current job, and there is an 80% chance that he will get laid off and end up in a job where he is earning $10,000 less than in his current job. What does this decision tell us about Jorge?

Jorge's assessment of himself as risk averse is incorrect. He is a risk taker.

Identify the fallacy in each situation.

Katrina won on the last three scratch tickets she bought at the grocery store, so she continues buying them. Hot hand fallacy Each year Beth bets her favorite team will make it to the playoffs, because they have never been there before and she believes they must be overdue. Gambler's fallacy Evan has not won his fantasy football league in 10 years and believes this will be the year he wins Gambler's fallacy

Monetary policy and fiscal policy are two different tools used by - to influence the economy. Monetary policy concerns using the national - to affect the economy, while fiscal policy uses - and expenditures in the government's -.

Monetary policy and fiscal policy are two different tools used by the federal government to influence the economy. Monetary policy concerns using the national money supply to affect the economy, while fiscal policy uses taxes and expenditures in the government's budget.

Which of the following groups would be included as unemployed when calculating the unemployment rate?

Not included: A 15 year old student searching for his first job Recently laid off workers who are not searching for jobs Retired workers Employed workers who want to work more hours Included: Recently laid off workers who are searching for new jobs

Match the situation to the inflation-related problem it illustrates. Producers are unable to determine how much output to produce. Unstable inflation makes it difficult for lenders to anticipate the value of their money in the future. A surprise increase in inflation devalues borrowers' future payments to lenders.

Producers are unable to determine how much output to produce. Price Confusion Unstable inflation makes it difficult for lenders to anticipate the value of their money in the future. Uncertainty about future price levels A surprise increase in inflation devalues borrowers' future payments to lenders. Wealth redistribution

The per capita GDP and GDP growth rates of Country A and Country B are the same. Nonetheless, the citizens of Country B are clearly better off. How could this be true? Fill in the blanks to complete the passage. The most natural interpretation of "better off" is that citizens of Country B have a higher -. It is possible that the citizens of Country B spend more time -. It is also possible that they live in a -. GDP - measure the quality-of-life indicators that would explain this.

Quality of life In leisure activities Cleaner environment Does not

Darius is offered a choice between two gambles on a fair coin flip: (1) Pay $100, win $110 on either heads or tails. (2) Pay $100, win $120 on heads and $70 on tails. Darius chooses (2). What sort of attitude does this choice reveal?

Risk taker option 1 $110 option 2 0.5($120) + 0.5($70) = $95

Identify the country to which each description applies.

Today's private property rights date back to a radical 1978 experiment. China Private property rights have been secure since about 1950. Taiwan Private property rights are not secure; land ownership records are unreliable. Liberia

When the federal government has more -than -, it has to borrow money to make up the difference. The borrowing is accomplished by selling - to investors. The federal government borrows from both domestic and foreign investors, though most national debt is held -.

When the federal government has more outlays than revenue, it has to borrow money to make up the difference. The borrowing is accomplished by selling Treasury bonds to investors. The federal government borrows from both domestic and foreign investors, though most national debt is held domestically.

Melanie is offered a choice between two gambles on a fair coin flip: (1) Pay $50, win $70 on either heads or tails. (2) Pay $50, win $10 on heads and $120 on tails. Melanie chooses (1). Now Melanie is given a third option: (3) Pay $50, win $40 on heads and $110 on tails. Given the choice to stay with gamble (1) or switch to gamble (3), Melanie chooses (3). What sort of attitude toward risk do Melanie's choices reveal?

risk neutral

Assume a nation is starting with zero national debt. If government outlays and tax revenue are as shown, and the nation's GDP is $12 billion at the end of Year 3, what is its debt-to-GDP ratio at that time? Round to the nearest whole percent.

year one $1 bil deficit year two $2.5 bil year three $.5 bil accumulated debt of 4 bil which is 33% of $12 bil

Max lives in Boston and earns $132,500 per year. If Max decides to move to San Francisco, what annual salary will he need to make in order to maintain the same real wage?

$164,000

Your parents bought their first car for $5,000. The price level in the year your parents bought their car was 50, while the price level today is 200. Calculate how much your parents' car would have cost if they bought it today.

$20000

Suppose the current CPI is 240 and in 2002 it was 180. A pair of Levi's jeans costs $54 today. Based on the CPIs, what would you expect the 2002 price to have been for the same style of Levis, in a similar retail outlet?

$40.50 price in 02 = price today x price level in 02/price level today

$53,000 is placed in an investment account that grows at a fixed rate of 2% (compound growth) per year. How much is in the account after four years? Round your answer to the nearest whole number.

$54060 year 2 $55141 year 3 $57369 year 4

You have been entered in a free game where you try to guess the roll of a six-sided die. You will win $50.00 if you guess right. What is your expected payoff value? Round to the nearest cent.

$8.33 = 50/6

Identify the correct formulas relating two measures of economic growth.

%change of real GDP % change of nominal GDP - % changes of price or %change of real per capita GDP = % change real GDP - % change of population

Suppose the consumer price index for one year was 120 and for the next year it was 132. What is the corresponding inflation rate?

10% (132-120) / 120 x 100 = 10%

What is the definition of an institution?v

A significant practice relationship, or organization

Why might the prices of some products decrease while others increase?

Advances i technology typically cause the price of some goods to decrease over time

Although institutions are often associated with a physical representative (like the Supreme Court building), the essence of an institution is a set of expectations and - that shape the - in which -.

Although institutions are often associated with a physical representative (like the Supreme Court building), the essence of an institution is a set of expectations and practices that shape the environment in which decisions.

How do non-market goods cause inaccuracies in measuring the productivity of a nation?

An economy with many non-market goods may have its output underrated.

Apply the correct label to each inflation-related problem. Labels may be used more than once. Because of extremely high inflation, David makes small weekly cash withdrawals instead of large monthly ones. Selena decides to move to a city with a very high cost of living, for a job with a slightly higher salary. Selena decides to move to a city with a very high cost of living, for a job with a slightly higher salary. Inflation forces a car dealership to increase its prices and pay for frequent ads in the newspaper to announce the changes.

Because of extremely high inflation, David makes small weekly cash withdrawals instead of large monthly ones. Shoe leather costs Selena decides to move to a city with a very high cost of living, for a job with a slightly higher salary. Money illusion Selena decides to move to a city with a very high cost of living, for a job with a slightly higher salary. Money illusion Inflation forces a car dealership to increase its prices and pay for frequent ads in the newspaper to announce the changes. Menu costs

Match the use of GDP data to the appropriate situation. Brad looks at GDP to determine what impact the recent recession has had on economic activity. Lupe examines the per capita real GDP of seven nations to determine which country might have the wealthiest citizens. Leia examines GDP over a ten-year period to determine whether the economy of a particular country is in decline or on the rise.

Brad looks at GDP to determine what impact the recent recession has had on economic activity. Measuring business cycles Lupe examines the per capita real GDP of seven nations to determine which country might have the wealthiest citizens. Measuring living standards Leia examines GDP over a ten-year period to determine whether the economy of a particular country is in decline or on the rise. Measuring long-term economic growth

Which of the following scenarios make it difficult to accurately measure the CPI?

Correct: The price of a ticket to a game increases after that stadium is rebuilt. A company releases a new product that many consumers adopt. Incorrect: The typical basket of consumer goods does not change. Consumers need to purchase gas to get to work.

Click on the names of countries where the standard of living improved significantly between 1950 and 2000.

Correct Poland, Turkey, Mexico, India Incorrect Nicaragua, Somalia

Which of the following situations may show framing or priming effects?

Correct: Employees at a company are more likely to sign up for a new benefit if they are automatically enrolled with the option to opt out, rather than given the chance to enroll for themselves. The results of a customer satisfaction survey are influenced by the order of the questions. Incorrect: David's company is struggling, yet he rejects a job offer from a higher paying company because he is afraid of change. A person invests in a conservative stock portfolio rather than looking for a better rate from a more aggressive investment.

A risk-neutral person will refuse to take a gamble with any risk.

False

All prices rise evenly during periods of inflation and deflation.

False

Natural resources are the decisive ingredient in any country's prospects for economic growth.

False

The unemployment rate includes discouraged workers and underemployed workers.

False must be actively seeking work

In an experiment, children were given a marshmallow and were promised a second marshmallow if they could wait 15 minutes to eat the first one. Only about one-third of the children earned the second marshmallow. What does this experiment illustrate about children's rationality?

Difficulty with intertemporal decision making

According to the table, Australia has the fifteenth-highest GDP among the countries with the largest economies in the world. Does this mean Australia also has the fifteenth-best standard of living? Fill in the blanks to complete the passage. Australia's GDP - that Australians have the fifteenth-best standard of living. A nation's - is a better standard-of-living indicator, because it measures -. Using this measure, it looks like Australia has a better standard of living than all but three other nations.

Does not indicate Per capita GDP Average income

A company has a 401(k) savings plan for its employees. The participation rate will be about the same whether people are given an easy enrollment form to fill out or are enrolled automatically but given an easy opt-out form to complete if they don't want to participate.

False

Two things tempt governments to enact inflationary policies. The first is -, which can be paid off by -. The second is -economy, which in the short term can be jump-started by a -increase in the money supply.

Government debt Printing money A sluggish Surprise

Place the countries in order of economic growth, least to greatest, for the period 1950-2008.

Haiti El Salvador Mexico Turkey

What could happen if the CPI were under-calculated?

Wages will below

In poor nations, access to - is lower than in wealthy nations. Moreover, it is typically lower for - than for -.

In poor nations, access to education is lower than in wealthy nations. Moreover, it is typically lower for women than for men.

In the last two decades, China's - has grown at just under - annually. China will soon rank among the world's - nations.

In the last two decades, China's real per capita GDP has grown at just under 10% annually. China will soon rank among the world's wealthiest nations.

Inflation occurs when the overall prices of goods -. This means that consumers have - purchasing power. Deflation occurs when the overall prices of goods -. When this happens, consumers have - purchasing power.

Increase Less Decreasing More

Which statement is not true of full employment output (Y*)?

It is the economic output when unemployment is at zero

Fill in the blanks to complete the explanation for why economists use the chained CPI. The chained CPI is - than the traditional CPI. The chained CPI is updated - in an effort to compensate for the - of new products. The traditional CPI has a strong - bias.

More accurate Monthly Price Changes Upward

Apply the appropriate label to each country.

Niger poor Israel rich Liberia poor Taiwan rich South Korea rich Tanzania poor

Do recessions always prevent a long-term increase in a nation's real GDP?

No, a nation will normally also have periods of economic expansion that balance out recessions.

Order the expected values of the following gambles from least to greatest.

Probability of winning: 80% Payout: $1000 Probability of winning: 15% Payout: $10000 Probability of winning: 50% Payout: $5000

Thirty years ago Daniel bought a plot of land for $50,000 when the CPI was 50. Now the CPI is 180 and he sold the land for $180,000. What issue might inflation cause for Daniel?

Tax distortions he will have to pay a capital gains tax on his land even though the real value of his land did not increase

Place the inventions in chronological order.

Telephone X ray machine Antilock brakes Photocopying Cell phone

Classify each concept as microeconomic or macroeconomic. The hiring decisions of a company The unemployment rate of a nation The financial decisions of a family The median income of a small state

The hiring decisions of a company Microeconomics The unemployment rate of a nation Macro The financial decisions of a family Micro The median income of a small state Macro

In the graph, click on the start and end points of a period of recession or contraction.

The tops and bottoms of the curves of the short run path of a business cycle

Match the situation to the decision-making difficulty that best describes it.

Wayne has a good salary and wants to have a comfortable retirement, but always seems to spend his entire paycheck. Intertemporal decision making A survey about the weather first asks respondents how often it has rained, then asks them if they believe there has been a drought. Priming effects A driver is reluctant to get rid of a car that turned out to be a bad buy, even though she could then buy a better one. Loss aversion

Michael had all his money in an investment portfolio that was moderately risky. The stock market fell and caused him to lose a lot of his money. In response, he then invested in a portfolio with a much higher potential payoff, but a lower expected value. How might an economist explain Michael's behavior? Fill in the blanks to complete the passage. The traditional model of risk behavior assumes that people are - in their risk-taking preferences. According to the traditional model, Michael should maximize his utility based on a rigid calculation of expected value. However, Michael's change in behavior caused by the fall in the stock market is consistent with a concept from psychology known as -. This concept suggests that people weigh the utilities and risks of gains and losses -. After the initial setback, Michael has become - tolerant of risk in an effort to make up for his losses.

consistent prospect theory differently more

Mary decides not to leave her current minimum-wage job for a higher-paying job. She knows the ropes at her current job and knows how to deal with her coworkers. She fears having to adapt to a new situation and getting to know a new set of people. What inconsistency in decision-making might cause this? Fill in the blanks to complete the passage. Mary could be exhibiting - because she wants to maintain her current work environment. Mary values keeping her current wage and familiar coworkers more than the opportunity to enhance her welfare. This is an example of - aversion. In this scenario, traditional economic theory assumes Mary would choose to - the higher-paying job. The field of economics that helps us understand why people's decisions sometimes contradict standard assumptions about rationality is called - economics.

status quo bias loss accept behavioral

Research by economist Maurice Allais illustrated that people make decisions consistently according to their risk preference, regardless of their financial circumstances.

False

Government borrowing to fund economy-boosting projects is self-defeating, since crowding-out will completely cancel out the benefits of the policy.

False Crowding out effect typically reduces the full impact of a fiscal policy, but does not completely eliminate it.

You can figure out how much the economy has grown over the years by simply looking at nominal GDP.

False Real GDP is a more accurate measure of economic growth because it corrects for inflation

The main contributor to rising Medicare costs is the rising prices in the health services sector.

False, people are living longer

Sean is buying a lotto ticket for a Fantasy 5 game, in which players try to predict which five numbers will be drawn out of the numbers 1 through 39. Since the number 17 hasn't been drawn in the last 60 days, Sean feels it is due to be drawn and therefore is a good number to bet on. Is Sean right? Fill in the blanks to complete the passage. Sean is -. This is an example of the -. Sean believes that the number 17 is overdue. The fact is, recent history makes the number 17 - to be drawn compared to other numbers.

incorrect gambler's fallacy equally likely

The diagram shows an ultimatum game in which Player 1 gets to decide how to share $1,000 with Player 2. If Player 2 accepts the offer, the sum is split according to the proposal. If Player 2 rejects the offer, neither player gets anything. (The dollar amounts shown in parentheses indicate the payoffs to Player 1 and Player 2, in that order.) In terms of traditional economic theory, which choices by Player 2 would be irrational? To answer, click or tap the appropriate "Accept" or "Reject" boxes below

irrational would be rejecting any offer where you would be making money

Match each term to its definition. A situation in which outlays exceed revenue A situation in which revenue exceeds outlays The total of all accumulated and unpaid deficits The fee that borrowers pay to debt holders

A situation in which outlays exceed revenue Deficit A situation in which revenue exceeds outlays Surplus The total of all accumulated and unpaid deficits Debt The fee that borrowers pay to debt holders Interest

Identify each item as either human capital or technology. An assembly line control system A factory team that together builds smartphones A worker who has been trained to service an electron microscope A method of extracting drinkable water from the ocean

An assembly line control system Technology A factory team that together builds smartphones Human capital A worker who has been trained to service an electron microscope Human capital A method of extracting drinkable water from the ocean Technology

Match each form of unemployment with an example. Note that every item may not have a match. An unemployed paper mill worker. The local paper mill shut down due to lack of demand for paper products in a digital age. An unemployed banker during a recession. The banker would be hired back once the economy began growing normally again. An unemployed stockbroker who is taking some time off before looking for a new job. An unemployed cashier. A small clothing store shut down due to its customers buying clothes from a new big-box retailer. A retiree. After a successful career in real estate, she now lives off her retirement savings and Social Security.

An unemployed paper mill worker. The local paper mill shut down due to lack of demand for paper products in a digital age. Structural unemployment An unemployed banker during a recession. The banker would be hired back once the economy began growing normally again. Cyclical unemployment An unemployed stockbroker who is taking some time off before looking for a new job. Cyclical unemployment An unemployed cashier. A small clothing store shut down due to its customers buying clothes from a new big-box retailer. Frictional unemployment A retiree. After a successful career in real estate, she now lives off her retirement savings and Social Security. Frictional unemployment

Place the events in sequence to describe how crowding-out happens.

Because of a recession, consumers have less disposable income to spend on durable goods, like cars. The state government passes a stimulus package that sends aid to struggling car manufacturing firm in the area. The car manufacturer uses government funding, instead of its own money to invest in improving its machinery. Despite the increase in spending, aggregate demand has not increased as much as expected.

In economics, cultural norms are a given—not a factor that can be critiqued and changed for economic reasons.

False

What is the basic idea behind the multiplying effect of government spending?

Every dollar spent is paid to someone who will turn around and spend a portion of it

Using the idea of bounded rationality, identify the reason why, in each situation, a consumer might fail to make the decision that rational models predict.

Gwyn's car is running out of gas. She stops at the first station she sees. Limited time Armando is shopping for shrubs for his yard. He has tried, unsuccessfully, to find out which shrubs are the most disease-resistant. Limited information Reilly has been shopping for a new laptop for weeks. At this point, he is having trouble distinguishing the different models he has seen. Limited capacity to process information

Mandatory outlays constitute - portion of the U.S. federal budget. They are determined by - and not subject to adjustment during the budget process. This category includes - and Medicare.

Mandatory outlays constitute the largest portion of the U.S. federal budget. They are determined by the law and not subject to adjustment during the budget process. This category includes Social Security and Medicare.

What is the main advantage of the Billion Prices Project over the CPI?

Many prices can be monitored daily

Anakin is given three options: (1) Pay $100 for an 80% chance of winning $400. (2) Pay $100 for a 30% chance of winning $600. (3) Pay $100 for a sure-thing payout of $300. If Anakin is a risk-neutral gambler, which way will he choose?

He will take the 80% chance of winning $400

Immediately following the 1982 Recession, the growth rate of real GDP was - and the increase in - was - than following the Great Recession. Both recessions were - the Great Depression.

Higher Unemployment Steeper Less severe than

What is the main advantage of the Billion Prices Project over the CPI?

Many prices can be monitored daily.

Fill in the blanks to complete the passage explaining why GDP is not always the best measure of a country's well-being. GDP is the best measure of a nation's economic activity. However, GDP does not take into account many factors that affect quality of life, like the amount of people's - or the cleanliness of the -. GDP only measures a country's economic -.

Leisure time Environment Output

A worker gets a raise of $120 per month and quickly decides to spend $90 of the money on necessities and the occasional luxury, while putting the remaining $30 into retirement savings. Based on this decision, calculate the worker's marginal propensity to consume, or MPC, as a decimal.

MPC = change in consumption/ change in income 90/120 = .75

Two people are playing an ultimatum game with $100. Player 1 can make an offer to Player 2, who can either accept or reject it. If Player 2 accepts, then they split the money according to Player 1's offer. If Player 2 rejects, then neither of them get any money. If Player 1 offers $2 to Player 2, what does traditional economic theory say Player 2 will do?

Player 2 will accept the offer Traditional economic theory says that both players are rational and therefore player 2 values $2 more than nothing and will accept it

Suppose you're working in your hometown. You have an opportunity to take a new job in a different city, where the cost of living is different. In each of the following situations, would your real wage be higher or lower in the new job?

Real wage would be higher: The cost of living in the new city is 35% lower and you'd be paid the same amount. The cost of living in the new city is 8% higher and you'd get a raise of 10%. The cost of living in the new city is 10% lower and you'd take a 5% pat cut. Real wage would be lower: The cost of living in the new city is 12% higher, and you'd get a raise of 10%

Place in chronological order the lag phenomena associated with the use of fiscal policy to smooth business cycles.

Recognition lag Implementation lag Impact lag

Match each major factor responsible for recent increased federal spending to the correct trend description.

Some recent spending increases, but generally well down from the 1960s Defense Huge spending growth after 2007 Anti-recession measures Significant spending growth over the last three decades Social Security and Medicare

In Greece, austerity measures undertaken to bring down the national debt have triggered street demonstrations. In which other European country has this happened recently?

Spain

Place the events in chronological order.

Start of Great Recession Economic Stimulus Act of 2008 National Elections American Recovery and Reinvestment Act of 2009 End of Reinvestment

Take 2014 as the price index base year. That year, you paid $80 for a day at a theme park. In 2015, the price was up to $84. Assuming that the increase reflects the inflation rate and that this rate continues in 2016, match each number to its description.

The cost of a theme park visit in 2016 dollars 88.20 The 2016 price index 110.25 The 2015 price index 105 The inflation rate as a percentage 5

Place the spending categories in order by their percentage share, greatest to least, of the 2012 U.S. federal budget.

Social Security Defense Income assistance Medicare Interest on debt

The United States produces six times as much corn per acre as it did 85 years ago. This has been accomplished by means of new - varieties of corn, improved products for - control, more efficient - techniques, and new -.

The United States produces six times as much corn per acre as it did 85 years ago. This has been accomplished by means of new hybrid varieties of corn, improved products for disease control, more efficient irrigation techniques, and new fertilizers.

In which sequence will events occur when the economy adjusts to an expansionary monetary policy, in the short run and then in the long run?

The Fed uses open market operations to increase the money supply thus lowering interest rates and stimulating investment. Increased aggregate demand leads to some higher prices and more total output. Sticky input prices adjust to inflation. Producers lay off some workers in response to higher input prices causing a decrease in aggregate supply. In the long run, equilibrium returns to the same initial production.Only the prices have changed

Match the situation to the factor that affects the accuracy of the CPI. The cost of bananas increases dramatically. Many people switch to oranges because they are cheaper. A new smartphone app solves math problems simply by pointing the camera at the page. The cost of cable increases. People decide to switch to Netflix instead. Newer cars have built-in GPS and Bluetooth capabilities. Video game consoles offer better graphics and gameplay than they did a decade ago. New pop-up stores at airports sell clothing, personal electronics, and designer eyewear at low prices.

The cost of bananas increases dramatically. Many people switch to oranges because they are cheaper. Substitution A new smartphone app solves math problems simply by pointing the camera at the page. New products The cost of cable increases. People decide to switch to Netflix instead. Substitution Newer cars have built-in GPS and Bluetooth capabilities. Changes in quality Video game consoles offer better graphics and gameplay than they did a decade ago. Changes in quality New pop-up stores at airports sell clothing, personal electronics, and designer eyewear at low prices. New locations

Classify each scenario according to the type of policy lag it illustrates.

The economy trends downward for two months, but economists are not sure if this signals the start of a recession. Recognition lag Congress approves a $100 mil spending package, but officials need six months to determine which projects to finance. Implementation lag Congress passes an immediate tax cut for all citizens, but it is another 24 months before GDP starts to climb once again. Impact lag Economists determine that unemployment has skyrocketed several months after it began to rise. Recognition lag A bill proposing a tax cut is held up in Congress by a filibuster. Implementation lag Government spending is cut by $100 bil, but inflation persists for another 12 months Impact lag

Which of the following is the correct definition of the new classical critique of fiscal policy?

The effects of expansionary policy are offset by increased consumer savings.

Apply the correct description to each policy example. The government postpones funding for upgrades to the nation's railway system. The government orders the construction of two new aircraft carriers. The government raises the top marginal income tax rate. Congress passes a 5% decrease in marginal tax rates.

The government postpones funding for upgrades to the nation's railway system. Contractionary The government orders the construction of two new aircraft carriers. Expansionary The government raises the top marginal income tax rate. Contractionary Congress passes a 5% decrease in marginal tax rates. Expansionary

Suppose the government has a balanced budget and wants to increase spending without changing tax rates. The government enters the loanable funds market to borrow $150 billion for economic stimulus spending. How much money is available for private investment after this action has shifted the demand curve as shown in the figure?

The new supply of loanable funds is $400 billion. After $150 billion for the government is subtracted, that leaves $250 billion for private investment. This is less than the original $300 billion.

What is the correct definition of technology?

The knowledge available for use in production

The main function of - banks is to accept deposits and then to lend the same money (minus -) back out. Banks make a profit by charging a higher interest rate on - than the interest rate they pay on -. Through the loan process, banks are actually able to - money.

The main function of commercial banks is to accept deposits and then to lend the same money (minus required reserves) back out. Banks make a profit by charging a higher interest rate on loans than the interest rate they pay on deposits. Through the loan process, banks are actually able to create money.

Jaime mailed in a raffle entry off the side of a cereal carton. The carton said that 1 in 800,000 entries would win. Which of the following is a rational motivation for Jaime to enter the raffle?

The raffle has a positive expected value

The standardized - made it much easier to transport goods around the world, by eliminating the need to - them every time the mode of -changed. This illustrates the key role of - as a factor of production.

The standardized shipping container made it much easier to transport goods around the world, by eliminating the need to repack them every time the mode of transportation changed. This illustrates the key role of physical captial as a factor of production.

What kind of government expenditure is defined as payments made to groups or individuals when no good or service is received in return?

Transfer payments include income assistance to the poor and payments to the retired and disabled.

Some amount of unemployment will always exist, even in a healthy economy.

True

Stock price volatility is often driven by fallacies rather than metrics that measure stock valuation.

True

The largest U.S. budget deficit since 1960 occurred during the Great Recession.

True

Underground economies are smallest in countries with strong economies.

True When the economy is strong, people have more opportunities to earn more money through legitimate work

Fiscal policy is usually intended to influence aggregate demand (AD) rather than short- or long-run aggregate supply (SRAS and LRAS, respectively).

True Fiscal policy is usually (but not always) used in an attempt to influence aggregate demand, either through changes in government spending or taxes.

Surprise inflation can help people who borrow money.

True future payments become devalued

There are parts of the world where the price of drinkable water is roughly comparable to that of gasoline in the United States.

True Liberia water is $3 per gallon

There are times when the government wants to slow down economic growth.

True this is the contractionary fiscal policy used to pay off some government debt and avoid inflation

Not all unemployment is -. Sometimes, unemployment is due to -, which is the introduction of new - and technologies that leads to the shutdown of other industries and jobs, as some jobs become -.

Unhealthy Creative destruction Products Obsolete

Correctly classify each situation that GDP cannot measure. Unregulated industries pollute the air. Country A has a very high GDP, but the average person works 60 hours a week. You repair your own pants when your rip them. A restaurant server takes home $75 in unreported tips each night.

Unregulated industries pollute the air. Quality of environment Country A has a very high GDP, but the average person works 60 hours a week. Leisure Time You repair your own pants when your rip them. Non-market good A restaurant server takes home $75 in unreported tips each night. Underground economy

Which questions explore microeconomic topics and which explore macroeconomic topics? Apply the correct label to each question. What effect did the interest rate have on inflation? What effect did falling home values have on unemployment? Why did Company C increase its advertising budget? Why did Billi buy a new house?

What effect did the interest rate have on inflation? macroeconomics What effect did falling home values have on unemployment? macroeconomics Why did Company C increase its advertising budget? microeconomics Why did Billi buy a new house? microecenomics

Apply the appropriate label to each situation. Your mom made a sweater for you for your birthday. Your child is paid $40 to walk your friends' dog while they are on vacation. Your mom made a sweater for you for your birthday. Your child is paid $40 to walk your friends' dog while they are on vacation. Your neighbors grow and eat their own vegetables from their private garden. The neighborhood kids sell lemonade when it is hot outside.

Your mom made a sweater for you for your birthday. Non-market good Your child is paid $40 to walk your friends' dog while they are on vacation. Underground economy Your mom made a sweater for you for your birthday. Your child is paid $40 to walk your friends' dog while they are on vacation. Your neighbors grow and eat their own vegetables from their private garden. Non-market good The neighborhood kids sell lemonade when it is hot outside. Underground economy