Econ test 2 practice

The difference between nominal income and real income is as follows: Nominal income is the number of dollars earned, while real income is a measure of the purchasing power of one's nominal income after adjusting for inflation.

True

The difference between nominal income and real income is as follows: Nominal income is the number of dollars ones earns or receives in income. Whereas, real income is a measure of one's true purchasing power, after adjusting for inflation

True

When we measure GDP, we can measure it either via spending done on the year's output of final goods, or via income earned by resources for their production of the year's output.

True

When we measure the output or GDP of an economy, we can measure it either of 2 ways: 1) Spending done on this year's output of goods, or 2) Income earned by resources for their contribution toward the production of this year's output.

True

Which of the following statements is true if your money income stays the same but the price of one good that you are buying goes up?

Your effective purchasing power falls.

Resources can be purchased

in the factor markets.

Goods and services are sold

in the product markets.

An increase in the average level of prices and goods is:

inflation

Changes in the stocks of finished goods and goods in process as well as changes in the raw materials that businesses keep on hand is known as

inventory investment.

The market value of goods that have been produced but not sold in this year:

is added to the producer's business inventory levels and GDP for that year.

The dollar value of final output

is equal to total income.

Total income

is the yearly amount earned by the nation's resources.

Suppose two countries have identical growth rates of real GDP and the same initial value of per capita real GDP. We know, then, that

living standards may differ in the two countries because we don't know how what the population growth rate is for each country.

The measurement system used by the U.S. government to estimate national income is

national income accounting.

Inflation refers to the situation when

the average of all prices is increasing.

Comparing two countries nominal GDP over time is likely to be misleading if one wants to determine whether standards of living are better in one country because

the figures need to be adjusted for price changes and population differences.

Net exports equal the

value of exports minus the value of imports.

Which of the following are examples of investment spending by businesses?

- Acquisition of additional buildings, factories, vehicles, equipment and tools. - Construction of residential buildings. - Changes in inventories. - Construction of new factories and office buildings.

Assume that in the year 1992, a market basket of goods typically purchased by an urban family of four each month cost $2000. If the price of that same market basket were to rise to $2200 in 1995, then we can say: Hint: Rate of inflation = [(Yr 1995 Price - Yr 1992 Price) / Yr 1992 Price] x 100

- Between 1992 and 1995, consumer goods typically purchased monthly by urban families rose in price by $200 - The rate of inflation between 1992 and 1995 was 10%

Which of the following is correct about "hyperinflation"?

- Hyperinflation is triggered by overspending relative to the amount of output that is produced. - Hyperinflation is a very high, fast rate of inflation, generally higher than 500%.

Tom has $10,000 in nominal savings which earns 5% interest each year. If inflation were to rise to 20%, what would happen to the real value of Tom's savings by the end of the year? (Hint: Real Savings = [Nominal savings x (1 +interest rate earned)] / (1+ inflation rate)

- The nominal value of Tom's savings would be $10,500, but its real value would be less than $10,500. - The real value of Tom's savings would have decreased, when adjusted for inflation.

The term 'transfer payment' refers to:

A payment to an individual for which no current goods or services are expected in return.

Within the United States economy, which one spending group accounts for roughly 70% of total output or GDP?

Consumption spending

Which of the following statements is NOT true about inflation?

During an inflationary period the price of all goods will increase.

The portion of GDP attributed to the government includes both transfer payments to the poor as well as government purchases of final goods.

False

The portion of total spending or GDP attributed to government purchases (G) includes both purchases of final goods and transfer payments to the poor.

False

C + I + G + (X-M) equals

GDP

Which of the following price indexes is the best overall indicator of overall inflationary pressures within an entire economy?

GDP Deflator

Real GDP is

GDP corrected for changes in the average of overall prices.

When government attempts to correct a market failure, but instead, generates an outcome that is worse than the market failure itself, we can say that _______________________ has occurred.

Government failure

In the Circular Flow __________ supply the factor services.

Households

The difference between real GDP and nominal GDP is:

Nominal GDP is the dollar amount of all output produced without adjusting for inflation; whereas Real GDP is the quantity of output produced after adjusting for inflation.

Which of the following is included in government purchases when measuring GDP?

The President's income.

Stewart's nominal income is $4,000. If inflation is 10%, what is Stewart's real income? (Hint: Real income = Nominal income / (1 + inflation rate)

The real value of Stewart's income would be $3636, when adjusted for inflation

If one seller in a perfectly competitive market chooses to charge more than the market equilibrium price, then we can expect that

The seller would lose his market share to other sellers.

GDP is the total market value of all final goods and services produced within the borders of a nation in a specific time period.

True

Gross domestic product or GDP is the total market value of all final goods and services produced within the borders of a nation in a specific time period.

True

Inflation refers to a general rise in prices. During inflation, some goods may rise rapidly in price, while other goods' prices may not rise at all. Yet still, some goods' price may actually fall during an inflation. However, enough goods are rising in price so as to impact the overall cost of living.

True

When measuring GDP via the income approach, we

add the income earned by the nation's resources in a given time period.

The spending approach to measuring GDP

adds the dollar value of final goods and services.

The income approach to measuring GDP

adds the income received by all factors of production.

Profits

are a cost of doing business because entrepreneurs would not incur the risk of starting a business if they didn't expect to earn profits.

The year that is chosen as the point of reference for comparison of prices in other years is known as the

base year.

If all prices in the economy go up from one year to the next, the CPI index, using the previous year as the base would

be greater than 100.

The components of GDP using the demand or spending method are

consumption spending investment spending, government purchases and net exports.

Before government implements any public program, government should first conduct a ___________________ analysis to determine whether the expected benefits to society outweigh the expected costs. If not, then the project is not worth funding with taxpayer's money.

cost-benefit

Robert received a $100 gift certificate to a bookstore a year ago. The economy has experienced a 10% inflation for the last year. This gift certificate is

has a real value of $90 today

All of the following are economic functions of the government EXCEPT

determining the wage rate for most jobs.

Providing public goods is a(n)

economic function of government.

In the Keynesian model

equilibrium output is demand determined.

The greater the inflation rate, the

faster the decrease in the purchasing power of money.

The circular flow of income assumes that

goods and services flow in one direction and money payments flow in the other.

The economic functions of the government deal with

promoting economic efficiency.

The economic functions of government include

protecting property rights.

The value of money for buying goods and services is known as

purchasing power.

Measurement of economic values after adjustments have been made for changes in the average of prices between years in known as

real values.

In a free market economy, an approach used by governments to address the issue of income inequality is to:

redistribute income from high income earning taxpayers to low income households in the form of transfer payments

The components of the spending approach to measuring GDP include all of the following EXCEPT

the implicit payments for unpaid household work.

The two main methods of measuring GDP are

the income approach and the spending approach.

The value of an item expressed in today's dollars is known as

the nominal value.

Real income is a measure of:

the purchasing power of one's nominal income

The value of an item expressed in purchasing power that varies with the overall price level is known as

the real value.

According to Chapter 6 titled, "Measuring a Nation's Income" in your Global Economics text, which of the following would *NOT* be included in our calculation of GDP?

the resale of a used compact Chevy automobile which was manufactured ten years ago

The computation of GDP by adding up the dollar value at current market prices of all final goods and services is

the spending approach.

Gross Domestic Product (GDP) is

the sum of all income paid to the factors of production.

Total income is defined as

the total amount earned by all resource owners.

The amount earned by the nation's factors of production is

total income.

In the base year the price index

will always equal 100.