ECON Exam 3

Your father earned​ $34,000 per year in 1984. To the nearest​ dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is​ 104?

$70288 Dollar Vlaue in 2014 = Dollar Value in 1984 x. (CPI in 2014/ CPI in 1984)

The figure shows the values of the components of GDP for the year 2018. Based on the data​ shown, which of the following statements regarding the components of GDP is​ false?

- Consumer spending on services is less than the sum of spending on durable and nondurable goods.

GDP is an imperfect measure of economic​ well-being because it fails to measure what types of​ production? Even if GDP included these types of​ production, why would it still be an imperfect measure of economic​ well-being?

- Household production and the underground economy. - The value of leisure is not included in GDP, GDP is not adjusted for crime or other social problems, GDP is not adjusted for pollution and it does not account for unequal income distribution. (All of the above)

As the economy nears the end of an​ expansion, which of the following typically​ occurs? Purchases of which types of goods are business cycles most likely to​ affect? Recessions cause the inflation rate to​ _________, and the unemployment rate to​ _________.

- Interest rates are usually rising The profits of firms will be falling. Wages are usually rising faster than prices. - durable goods - ​decrease; increase

Briefly answer the two questions asked in the headline. What is the shadow​ economy? Why does the shadow economy​ matter?

- It is the part of the economy where the buying and selling of goods and services is concealed from the government. - Having a large shadow economy may be a sign that government policies are making it difficult for many businesses to operate openly.

Define​ "creative destruction." Briefly explain the role that it plays in economic growth. When creative destruction​ occurs,

- It refers to the process of new technologies advancing living standards while destroying many existing firms. - new products and new technologies may be created that improve worker​ productivity, ultimately increasing the growth rate of the economy in the long run.

What does the article mean by a​ "trade dispute"? How might Mexico gain from a trade dispute between the United States and​ China? Assuming the United States imposes tariffs on Chinese exports to the United​ States, Mexico benefits from the trade dispute because

- It refers to the situation that occurs when two countries impose tariffs and​ non-tariff barriers on each other. - firms may relocate their operations from China to Mexico to avoid U.S. tariffs on goods imported from China. it makes buying those goods from Mexico relatively cheaper than buying them from China. (Only A and B are correct)

Before the arrival of the​ Internet, people looking for​ facts, such as the population of France or the salary of the president of the United​ States, had to go to the library to look them up. Now people can find that information in a few seconds with a Google search. Are the benefits to you of being able to do a Google search included in​ GDP? It has been argued that the slowdown in U.S. productivity growth in recent years is just a measurement problem. Is your answer above consistent with that​ argument?

- No, because the benefits are diffused throughout the economy. - Yes, because the benefits are difficult to measure.

Suppose a house is built and sold in the year 2010. If the house is resold in the year​ 2021, is the value of the house included in Gross Domestic Product ​(GDP) for​ 2021? Would the services of a real estate agent who helped sell​ (or helped​ buy) the house be included in GDP for​ 2021?

- No. GDP for 2021 includes only production that occurs during 2021. - Yes. GDP for 2021 includes the market value of final goods and services. This includes real estate services.

In the 1961 edition of his​ best-selling introductory economics​ textbook, the late Nobel laureate economist Paul​ Samuelson, noted that Soviet GDP might become larger than U.S. GDP by 1984. In​ 1961, why might a leading economist have expected the Soviet economy to eventually have become larger than the U.S.​ economy? Briefly explain why the Soviet economy failed to overtake the U.S. economy.

- There were rapid increases in capital per hour​ worked, which led to rapid increases in real GDP per hour worked. - The Soviet Union experienced diminishing returns to capital and a slower rate of technological advance.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the​ next? How does real GDP deal with the problem inflation causes with nominal​ GDP?

- When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities. - By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced, Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years, Real GDP separates price changes from quantity changes. (All of the above)

Which equation represents the relationship between GDP and the four major expenditure​ components? What are the four major components of expenditures in​ GDP?

- Y=C+I+G+NX -​ Consumption, Investment, Government​ Purchases, and Net Exports

What advice for finding a job would you give someone who lost his or her job because of machine​ learning? If someone lost his or her job because of machine​ learning, that person would be considered

- You should tell the worker that he or she needs to learn new skills or move to another city to find a job. - structurally unemployed.

The new growth theory states that The new growth theory differs from the growth theory developed by Robert​ Solow, since

- firms will add to an​ economy's stock of knowledge capital by engaging in research and development or by contributing to technological change. - the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.

The BLS defines a job quit as a​ "voluntary separation initiated by an​ employee." The BLS estimated that there were 5.4 million job quits in March 2019. Unemployment caused by an increase in job quits would be classified as An increase in the number of job quits would suggest that it is becoming

- frictional unemployment. - easier to find jobs because employees who leave voluntarily are confident of finding another one.

Between 1950 and the​ mid-1990s, the United States experienced a much larger increase in the standard of living than the Soviet Union. This difference can be most attributed to the fact that the U.S. Which of the following is a reason the U.S. experienced larger economic growth than the Soviet​ Union? ​(Check all that​ apply.)

- had a greater amount of technological change. - The U.S. had a greater amount of private property rights. The U.S. had a market economy that allowed for greater entrepreneurship to occur.

Increases in the minimum wage will The unemployment rate in the United States is usually​ ________ than the unemployment rates in most other​ high-income countries, partly because the United States has​ _________ requirements for the unemployed to receive government payments.

- increase unemployment among teenagers. - ​lower; more stringent

The economic growth model predicts that the Have poor countries been catching up to rich​ countries?

- level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations. - There has been​ catch-up by some poor but industrialized countries.

The ease with which a financial security can be exchanged for money is referred to as Even though individuals earn interest on financial investments such as​ bonds, mutual​ funds, and certificates of​ deposits, they may still hold wealth in checking accounts because

- liquidity. - individuals need money that is available to be spent on goods and services.

In discussing the labor market during the recovery from the​ 2007-2009 recession, Federal Reserve Chair Janet Yellen noted that​ "the employment-to-population ratio has increased far less over the past several years than the unemployment rate alone would​ indicate, based on past​ experience." During an economic​ expansion, we would normally expect the​ employment-population ratio to increase as the unemployment rate falls because During the recovery from the​ 2007-2009 recession, the​ employment-population ratio did not increase as much as it might have been expected to because

- more people are likely to be employed. - the recovery was sluggish and employment did not expand as rapidly.

An article in the Wall Street Journal contained the following​ observation: "Every​ month, millions of workers leave the job market because of​ retirement, to care for children or aging​ parents, to pursue more​ education, or out of discouragement. Millions of others jump in after​ graduating." The millions of workers leaving the job market for the reasons given are Even if they​ don't find a job right​ away, people entering the job market after graduating from high school or college will

- not counted as unemployed in the BLS data because they are no longer actively looking for work. - be counted as part of the labor force by the BLS if they are actively looking for work.

Economic growth will Some economies are able to maintain high growth rates despite diminishing returns to capital by using

- slow down or stop if more capital per hour is used because of diminishing returns to capital. - better or enhanced​ technology, along with accumulating​ capital; these economies are growing because​ technology, unlike​ capital, is subject to increasing returns.

Capital can be differentiated between physical capital and human capital. Human capital is Which of the following is the best example of human​ capital?

- the knowledge and skills workers acquire from education and training or from their life experiences - a worker gets a college degree

Gross domestic product is best defined as What happens if we measure GDP by adding up the value of every good and service produced in the​ economy?

- the market value of all final goods and services produced in a country during a period of​ time, typically one year. -GDP is overestimated because of double counting.

The labor force participation rate is calculated by Use the graph to the right to help determine which of the following statements regarding the labor force participation rates of adult men and women since 1950 is false.

- the percentage of the​ working-age population that is in the labor force or (Labor force/Working−age population) ×100. - The labor force participation rates of adult men and adult women were equal in 1990.

Which of the following is included in the​ economist's definition of​ investment? In calculating​ GDP, which levels of government spending are included in government​ purchases?

- the purchase of new​ machines, factories, or houses - spending by​ federal, state, and local governments

The natural rate of unemployment is When the economy is at full​ employment, unemployment is equal to

- the sum of structural unemployment and frictional unemployment. - the natural rate of unemployment.

The average German worker worked more than 400 fewer hours per year and earned nearly​ $13,000 less than did the average worker in the United States. Can we conclude anything about the​ well-being of the average German worker versus the​ well-being of the average worker in the United States from these​ data? What other measures would you like to see in evaluating the​ well-being of workers in these two​ countries? Can we conclude anything about the​ well-being of the average German worker versus the​ well-being of the average worker in the United States from these​ data? What measures besides average number of hours worked and real per capita GDP would you like to have to evaluate the​ well-being of workers in OECD​ countries?

- ​No, because although the German worker earned less per​ year, they also worked less per year. - Indicators of​ pollution, crime and other social​ problems, and the distribution of income.

​Long-run growth in GDP is determined by Technological progress is affected by ​(check all that​ apply)

- ​capital, labor​ productivity, and technology. - new software developments, investment in capital, private property rights, and entrepreneurship

In April​ 2019, the​ working-age population of the United States was 258.7 million. The​ working-age population is divided into those in the labor force​ (162.5 million) and those not in the labor force​ (96.2 million). The labor force is divided into the employed​ (156.6 million) and the unemployed​ (5.8 million). Those not in the labor force are divided into those not available for work​ (91.3 million) and those available for work​ (4.9 million).​ Finally, those available for work but not in the labor force are divided into discouraged workers​ (0.5 million) and those currently not working for other reasons​ (4.4 million). Use this data to help determine which one of the following statements is​ true

Both A and B above are true.

Which of the following statements about compounding is​ correct?

Compounding magnifies even small differences in interest rates or growth rates over long periods of time.

Suppose that the economy enters into a recession and​ that, as a​ result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy​ recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck​ mechanic?

Cyclically unemployed

In the circular flow of expenditure and​ income, why must the total value of production in an economy equal the total value of​ income?

Every penny spent on a good or service must end up as​ someone's income.

The role of the entrepreneur becomes much more important in the new growth theory—the endogenous growth model—than in the traditional economic growth model because

In the new growth​ theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.

When low income countries begin to experience economic​ growth, they often do so at rates much higher than current growth rates of industrial nations. Which of the following does not provide an explanation of this​ phenomenon?

Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital.

Which of the following is not a cost created by high​ inflation?

Inflation causes the real wage to fall which means that firms have to pay more for workers.

Use the graph to help determine which one of the following statements is​ true:

The average American in the year 2018 could buy more than eight times as many goods and services as the average American in the year 1900.

We often use real GDP per capitaLOADING... as a measure of a​ country's well-being. Review the definition of real GDP per capita before answering the following question. ​ Today, the typical American works fewer than 40 hours per week. In​ 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the​ population's economic​ well-being?

The increase in real GDP per capita between 1890 and today understates​ well-being because the value of leisure is not included in GDP.

An article on the brookings.edu website quotes Akinwumi​ Adesina, the president of the African Development​ Bank, as asserting that​ "Africa is not going to be developed by aid. It will be developed by​ investment." a. What type of aid was Adesina referring​ to? b. What type of investment was he referring​ to? Why might he believe that investment would be more important to the development of African countries than would​ aid?

a. Cash transfers or​ low-interest loans from foreign countries. b. Foreign direct and foreign portfolio investment. - It would give Africa access to technology and funds that otherwise would not be​ available, which is a key factor to economic growth.

Indicate which component of GDP will be affected by each of the following transactions involving General Motors. a. You purchase a new Chevrolet Silverado pickup from a GM dealer. b. You purchase a 2017​ (preowned) Chevrolet Silverado from a friend. c. GM purchases door handles for the Silverado from an auto parts manufacturer in Indiana. d. GM produces​ 1,000 Silverados in a factory in​ Flint, Michigan, and ships them to a car dealer in​ Shanghai, China. e. GM purchases new machine tools to use in its Flint factory. f. The state of Michigan builds a new highway to help improve access to​ GM's Flint plant.

a. Consumption Expenditure b. Not included in GDP calculation c. Not included in GDP calculation d. Net Export Expenditure e. Investment Expenditure f. Government Expenditure

An article in the Economist describes the views of Santiago​ Levy, a former official of the​ Inter-American Development​ Bank: "He thinks that Mexico . . . needs to replace restrictions on firing with unemployment insurance and shift the tax burden away from​ payrolls, abolish tax perks for small firms and take contract enforcement more seriously. The prize would be faster growth . . . and​ better-paid jobs." a. Why might replacing legal restrictions on firing workers with unemployment insurance​ (which is the approach used in the United​ States) increase economic​ growth? b. What are the possible negative effects of taxing business payrolls rather than taxing​ incomes? Taxing business payrolls is likely to​ _______ the number of workers hired and​ _______ the return to working​ (and saving and​ investing). c. What is a​ "tax perk"? d. What does Levy mean by​ "contract enforcement"? By​ "contract enforcement," Levy is implying that agreements made by individuals and firms should be Why might better contract enforcement increase economic​ growth? Without contract​ enforcement,

a. Firms may hire more workers if they can fire workers with low productivity or those who are a poor fit for the job. It would make it easier for firms to get rid of workers who it no longer needs or who are not productive in their job. (Only A and B are correct) b. reduce; lower c. A​ "tax perk" is a decrease in a​ firm's tax obligation. Firms that receive tax perks are more likely to grow and expand than firms that​ don't receive tax perks. Levy must be assuming that the productivity of small firms is lower than the productivity of large firms. In which​ case, favoring small firms with tax perks is likely to decrease the growth of the Mexican economy. ​d. binding, and individuals and businesses that do not fulfill their end of the bargain will face repercussions. - bribery and government corruption are more likely to exist. firms may be reluctant to enter into agreements with other​ firms, resulting in slower and more inefficient production. firms may have difficulty finding investors willing to provide them with the funds they need to expand. (All of the above)

An article in the Wall Street Journal ​notes, "Productivity improvements are a key ingredient for the U.S. economy to maintain a​ 3% growth​ rate, a goal of the Trump​ administration." a. What economic variable was the Trump administration hoping would grow at a rate of 3 percent per​ year? b. What is the connection between productivity growth and growth in the variable you identified in part​ (a)? Productivity refers to​ ____________, and increases in productivity are a key determinant of this​ variable's growth rate.

a. Real GDP b. the quantity of goods and services that can be produced per worker or per hour of work

An International Monetary Fund Factsheet made the following observation regarding sound financial​ systems: "A​ country's financial system . . .​ help[s] channel savings into​ investment, thereby supporting economic​ growth." a. Briefly explain how the financial system channels savings into investment. ​Aren't savings already​ investment? If​ not, what type of investment is the Factsheet referring​ to? b. How does channeling savings into investment support economic​ growth?

a. Savers provide funds to firms by buying the​ firms' stocks and bonds and by depositing funds in banks. - ​No, investment, as used in this​ context, refers to expenditure on new capital and new technology. b. Firms can acquire funds to invest in new capital and new​ technologies, which increases worker productivity and thus economic growth.

An article by Gary Burtless of the Brookings Institution​ noted, "From the perspective of​ workers, the U.S. unemployment insurance​ (UI) system is one of the least generous in the industrialized world. . . . The distinctive feature of the U.S. system is that benefits do not last very​ long." a. What are the costs and benefits to the U.S. economy of paying unemployment benefits for only a few months compared with paying benefits for a longer​ period, as Canada and countries in Western Europe​ do? b. Are the costs and benefits you discussed in part​ (a) different during an economic expansion than during an economic​ recession? Briefly explain.

a. The benefit is that it increases the incentive for workers to find a job more​ quickly; however, workers may be forced to take jobs for which their skills are not well suited. b. Yes, if unemployment insurance payments are available for only a short time during a​ recession, workers are likely to suffer large drops in income and the economy would suffer the results of the decrease in consumption spending.

An opinion article in the Wall Street Journal argues that following the Chinese​ government's crackdown on​ pro-democracy demonstrators in​ Beijing's Tiananmen Square in​ 1989, "Initiatives to allow public oversight and the rule of law were now strictly off the reform​ agenda." a. What does the article mean by​ "the rule of​ law"? ​"The rule of​ law" refers to the ability of a government to b. Why do economists believe that a​ country's government needs to operate according to the rule of law if the country is to achieve sustained economic​ growth? To answer this​ question, determine whether each of the following statements is true or false. c. If the article is correct that the Chinese government has not followed the rule of​ law, what explains the high rates of growth of the Chinese​ economy? In your​ answer, briefly discuss whether the government of the Soviet Union followed the rule of law during its period of rapid economic growth and the similarities and differences between how economic growth occurred in the two countries.

a. enforce the laws of the​ country, particularly with respect to protecting property rights and enforcing contracts. b. If laws are not well​ enforced, buyers and sellers may be hesitant to participate in market transactions. True Without the rule of​ law, bribery and corruption are more likely to exist. True Without the rule of​ law, firms will be sued and forced to pay damages if they fail to carry out a contract. False Production will take place more quickly and efficiently when firms are not restricted by the rule of law. False c. Neither China nor the Soviet Union followed the rule of law. Both countries achieved high rates of economic growth as large fractions of their populations moved out of​ lower-productivity agricultural occupations and into​ higher-productivity, non-agricultural occupations. Both also benefited from increasing rapidly what had been very low levels of capital per hour worked.

Property rights have been determined to be a major factor that helps countries sustain economic growth. Governments can change laws and policies in order to give individuals and firms more freedom. By doing​ so, government can help promote growth because greater property rights

give entrepreneurs more incentive to take risks that create new​ products, ideas, and more technology.

Crowding out occurs when

governments must borrow funds which causes interest rates to rise and thus private investment is reduced.

In an interview with the Wall Street​ Journal, Prime Minister Narendra Modi of India stated​ that: ​"In two​ years, we have done a lot to position India to thrive in the changing​ world." He mentions that under his administration restrictions on foreign investment into India have been loosened. All of the following are reasons that would explain why loosening restrictions on foreign investment help position India to thrive except

if restrictions on foreign investment were​ loosened, it would decrease the need for Indian firms to save and invest.

In an economy with rising​ prices, compared to the base​ year,

nominal GDP is larger than real GDP in years after the base year.

Inflation can affect the distribution of income because

people with incomes rising faster than the rate of inflation enjoy an increasing purchasing​ power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.

Why do economists believe that setting a goal of zero percent unemployment is not feasible or​ desirable? Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because

the economy needs some​ short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets.

The financial system—either financial markets or financial intermediaries—provides savers and borrowers with all of the following​ except:

the financial system provides security to savers by warranting that their funds are fully insured against loss.

The type of inflation that is a greater problem to society is

unanticipated​ inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future.

When​ Ségolène Royal was running unsuccessfully for president of​ France, she proposed that workers who lost their jobs would receive unemployment payments equal to 90 percent of their previous wages during their first year of unemployment. If this proposal were​ enacted, the unemployment rate in France

would have gone up as the opportunity cost of job search would have decreased.

An article in the Wall Street Journal referred to​ "gross domestic product—the value of all goods and services produced in the​ U.S." Briefly explain whether you agree with this definition of GDP.

​Disagree, because GDP measures the value of all final goods and services produced in an​ economy, not all the goods and services produced.

The graph shows the relationship between​ country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per​ capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth are​ true:

​Korea, Taiwan, and Hong Kong had the lowest incomes in 1960 and grew the fastest between 1960 and 2017.