Econ Test 3
Suppose workers agreed to a contract that guaranteed a real wage increase of 3 percent per year. If the inflation rate was 7 percent over the following year, what is the required increase in the nominal wage to meet the contract requirements?
10%
Suppose that the Department of Transportation is compiling data on traffic accidents and it wants to present the data in the form of an index. If there were 2,000 accidents in the base year, 2007, and 2,100 accidents in 2008, what is the value of the index for 2008?
105
If the CPI for 2008 was 112, the typical market basket purchased that year would cost
12 percent more than the same market basket purchased in the base year
In the following index, which year is most likely to be the base period: 2003 = 123.3; 2004 = 145.3; 2005 = 111.4; 2006 = 100; 2007 = 94.3?
2006
Suppose that production of a good creates a negative externality. An excise tax equivalent to the difference between the marginal social cost and the marginal private cost of production can correct the inefficiency. T or F
True
Which of the following units is used to measure nominal GDP in the United States?
US dollars
Which of the following is a pure public good?
a fireworks display
Which of the following would be counted in U.S. GDP?
a new US produced radio bought by a Japanese citizen living in Kyoto
Involuntary exchanges, such as robbery,
are not Pareto improvements
Which of the following is an example of a regulatory action?
automobile manufacturers are required to include built-in intact seats
If a newspaper reporter wanted to learn about changes in the U.S. price levels, she would probably get that information by looking at the
consumer price index
Which of the following real-world phenomena does the classical model ignore?
cyclical unemployment
One reason why economists often appear to disagree when asked about the impact of some bad economic news is that
economists often appear to be disagreeing when one is talking about long-run impact while the other is referring to short-run impacts
Classical economists believed that production could be stuck below its full employment level for a long period of time. T or F
false
During a recession, both output and unemployment fall. T or F
false
If Panama has a high opportunity cost of producing salmon steaks, then it should export salmon steaks. T or F
false
If the rate of economic growth is positive, then everyone becomes better off. T or F
false
Most recessions last approximately three years. T or F
false
One macroeconomic goal is to achieve an unemployment rate of zero. T or F
false
Since World War II, there has been a worldwide movement away from free trade policies. T or F
false
The Consumer Price Index (CPI) is a weighted average of all the prices paid by households for goods and services. T or F
false
The U.S. economy experienced fluctuations in employment and output over the last half of the twentieth century. However, the length of the average recession has been about the same as the length of the average expansion. T or F
false
The United States economy has achieved the target rate of unemployment, as set by the Full Employment and Balanced Growth Act (1978), for most years over the last few decades. T or F
false
The equilibrium price of automobiles is a primarily macroeconomic issue. T or F
false
The unemployment rate is usually zero except during recessions. T or F
false
When people buy land, their purchases are included in GDP. T or F
false
Whenever prices are rising, the inflation rate is rising. T or F
false
What is the difference between an intermediate good and a final good?
final goods are finished and ready for sale; intermediate goods require further processing
Even though households do not actually purchase certain items, the government estimates and adds to the consumption component what the household would pay for these items in the marketplace. An example of this type of item is
food that a farm family grows for themselves
Which of the following is a reason why the Consumer Price Index (CPI) is not calculated as a simple average of all prices?
goods differ in their importance in the average consumer's budget
Because of the free rider problem
governmental solutions to externality problems are often needed
If free international trade opens up and a country has a comparative disadvantage in sugar production, we should expect
greater sugar consumption in that country
Anti-trust law
has been used to break up monopolies
A nation should only import those goods for which it has
higher opportunity costs than its trading partner
Susie grows corn in her backyard garden to feed her family. The corn she grows is not counted in GDP because
it was not produced for the marketplace
When a positive externality exists, the marginal social demand curve
lies above the market demand curve
Which of the following is a major macroeconomic goal? 2
low unemployment
The sale of which of the following would appear without any modification in GDP?
maid services
Which of the following is more of a short-run than a long-run goal?
moderating economic fluctuations
If real GDP is increasing at a 2 percent annual rate while the unemployment rate is 7 percent, the economy is
not achieving full economic potential
A market failure in the form of an externality arises when
not all cost and benefits are included in the price of a good
Objections to free trade
often come from those who are harmed by trade
A contract
often requires one party to do something first, and the other party to do something later
Individuals in countries with __________ often spend considerable time trying to secure resources from others.
poorly defined property rights
Assume net exports are -$220, consumption is $5,000, tax revenues are $1,000, government purchases are $1,500, and 2003 GDP, calculated by the expenditure approach, is $8,000. We can conclude that
private investment was $1,720
One way in which antitrust law fosters economic efficiency is by
prohibiting firms from colluding to raise prices
Disputes over resource ownership are the domain of
property law
The rights of a co-owner to a share of a firm's profits are
protected under contract law
Government can play a crucial role in promoting economic efficiency by
providing physical and institutional infrastructures
Which of the following would not be included in the consumption component of GDP?
purchase of a new home
Which of the following statements is true?
real GDP = (nominal GDP / price index) X 100
In only one of the following situations is a nation's standard of living certain to increase. Which one?
real GDP rises faster than population
An economic function of criminal law is to
reduce the number of involuntary exchanges
The two defining characteristics of pure private goods are
rivalry and excludability
Market failure occurs when
some Pareto improvements are not made
Which of the following is a major macroeconomic goal?
stable prices
The prices of which of the following goods would be included in the Consumer Price Index?
tennis shoes
If Country A exports a good to Country B, who is made worse off?
the consumers in Country A and the producers in Country B
Which of the following factors does not help explain incomplete specialization by countries that trade in accordance with comparative advantage?
the cost of making trade deals may have become extremely low because of the existence of the World Trade Organization.
What major historical event led to the most significant challenge to classical economic thinking?
the great depression
The market clearing assumption is
the idea that prices in every market will adjust until quantity supplied and quantity demanded are equal
In a labor market diagram, the point at which the labor supply curve crosses the labor demand curve is
the point at which everyone who wants to work is able to find a job
Monopoly is a prime example of a market failure that leaves potential Pareto improvements unexploited. This is demonstrated by the fact that
the price in a monopolized market exceeds the marginal cost of production
Suppose that the inflation rate was 4 percent in 2002 and 3 percent in 2003. This would mean that
the price level rose at a slower rate in 2003 than in 2002
In a single-price monopoly market
the quantity produced is artificially low, thereby creating an inefficiency
Gross domestic product (GDP) is
the total value of all final goods and services produced for the marketplace during a given period, within a nation's borders
Which of the following is the best example of a stock variable?
the total wealth of the 50 richest us citizens
Many saltwater fish species are currently being overexploited. This is an example of
the tragedy of the commons
If firms make agreements that reduce the amount of competition in a market,
they would face penalties under antitrust legislation
If prices (as measured by the CPI) tripled and nominal wages tripled, what would happen to real wages?
they would remain unchanged
If goods are produced abroad but consumed domestically,
those goods are termed imports
Which of the following is the best example of an intermediate good?
tires purchased by an automobile manufacturer for installation on new cars
One way to achieve efficiency in a market with a negative externality is
to raise the market supply curve to the position of the marginal social cost curve
Which of the following statements correctly describes international trade in accordance with comparative advantage?
trade may well make some citizens in each trading country worse off
What is the main factor that explains why government spending typically exceeds government purchases?
transfer payments
An index number is important only in a relative sense -- in comparison to an index number from another period. T or F
true
Assume that India has a comparative advantage in producing a computer game. The United States has an absolute advantage in producing the same game. Mutually advantageous trade will have India producing and exporting the game while the United States will specialize in producing something else. Tor F
true
Changes in business inventories are part of private investment spending. T or F
true
Contracts tend to increase the level of specialization in an economy. T or F
true
If Armenia can produce rugs more efficiently than any other country, it does not necessarily benefit from producing rugs for international trade. T or F
true
If the actual real wage exceeds the equilibrium wage, there will be an excess supply of labor. T or F
true
Periodic fluctuations in GDP are called business cycles. T or F
true
The Full Employment and Balanced Growth Act of 1978 set the target unemployment rate for the United States economy at 4 percent. T or F
true
According to the Coase theorem,
under certain conditions, the private market will solve externality problems efficiently
In the classical long-run model,
we focus on labor resources, rather than capital or land
The real wage rate measures
what workers are paid in terms of purchasing power
The aggregate production function shows how much output the economy can produce
with different quantities of labor, for given amounts of land and capital, and a given state of technology
Assume that Ernesto earned a nominal wage rate of $15 per hour in 2001, the base year for the CPI. If the CPI in 2002 was 102.6 and his nominal wage rate was $16 per hour, what was his real wage rate in 2001?
$15.00
This year, Tom sold his 1998 minivan to Honest John's Used Car Emporium for $5,000. Honest John then sold the van to Bob for $7,000. How much would be recorded in GDP this year from these transactions?
$2,000
A Texas oil company extracts petroleum and sells it to a refinery for $1,000. After processing, the refinery sells the gasoline to a wholesaler for $1,500, who then sells it to a gas station for $1,700. The gas station sells it to customers for $2,500. In these transactions, how much has been added to GDP?
$2,500
In 2008, Computers, Inc. produced personal computers worth $20 million. If $16 million worth were sold and $4 million worth remained unsold at year end and were added to inventories, how much did Computers, Inc. contribute to GDP in 2008?
$20 million
Fun Time Toys produced $60 million worth of toys in 2008. Because of a slow Christmas shopping season, only $50 million worth was sold to consumers, and the remaining $10 million worth went into inventories. Based on this information, how was GDP affected in 2008?
$60 million was added to GDP; $50 million was classified as consumption spending and $10 million was classified as private investment
From 1929 to 1933, U.S. output dropped by about
25%
If the base year for an index is 2005 and the value of the index in 2008 is 165.1, by what percent has the measure grown over those 3 years?
65.1%
Since the late 1970s, economic growth has
improved the living standards of highly skilled workers while less-skilled workers have become worse off
The Consumer Price Index (CPI)
includes the prices of some used consumer goods
Over the past 80 years, real GDP has
increased dramatically
The marginal social cost (MSC) curve
indicates the total cost of production, when all cost are considered
Which of the following statements is true about the behavior of the CPI?
it has risen steadily since 1960
GDP is a flow variable because
it measures the production that takes place over a period of time
