Exam 2

GDP is not a perfect measure of well-being because

GDP is not adjusted for pollution.

Counting part-time workers who are looking for full-time work as employed overstates the degree of joblessness in the economy.

False

For developed countries like the United States, GDP will always exceed GNP.

False

Inflation usually increases during a recession and decreases during an expansion.

False

Potential GDP is the maximum output a firm is capable of producing.

False

Residential investment includes spending by firms on office buildings.

False

The inflation rate measures the average prices of goods and services in the economy.

False

The size of the underground economy as a percent of GDP is larger in the United States as compared to poorer countries such as Zimbabwe.

False

The increased generosity of unemployment insurance programs in Canada as compared to the United States should

increase the duration of unemployment in Canada as compared to the United States.

What is investment in a closed economy if you have the following economic data? Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion

$3 trillion

Refer to Table below. Real GDP for Vicuna for 2013 using 2015 as the base year equals Year Oranges Produced Price of Oranges Shirts Produced Price of Shirts 2013 1,800 $0.90 110 $30.00 2015 2,000 1.00 110 35.00 Consider the data shown above for Vicuna, a country that produces only two products: oranges and shirts.

$5,650.

Suppose that a simple economy produces only four goods and services: sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used in the production of the coffee drinks. Using the information in the above table, nominal GDP for this simple economy equals

$8,750.

Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2016, then the value of your grandfather's salary in 2016 dollars is approximately

$84,775.

Suppose that real GDP for 2015 was $10,000 billion and real GDP for 2016 was $9,500 billion. What is the rate of growth of real GDP between 2015 and 2016?

-5%

Refer to Table below. Given the information above, calculate the GDP deflator in 2016. 2015 2016 Nominal GDP $10,000 $12,000 Real GDP 9,500 10,500

114

Refer to Table below. Assume the market basket for the consumer price index has three products — Cokes, hamburgers, and CDs — with the following values in 2011 and 2016 for price and quantity: The Consumer Price Index for 2016 equals Product Quantity Price Price Cokes 100 $0.50 $0.75 Hamburgers 200 2.00 2.50 CDs 10 20.00 21.00

121.

Refer to Table below. Consider the following values of the consumer price index for 1996, 1997, and 1998: The inflation rate for 1997 was equal to Year CPI 1996 157 1997 161 1998 163

2.5 percent.

If the GDP deflator rises from 185 to 190, what is the rate of inflation between the two years?

2.7%

If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from

23.3 years to 17.5 years.

Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid?

3 percent

If the number employed is 190 million, the working-age population is 230 million, and the number unemployed is 10 million, then the unemployment rate is

5%.

If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2016, we would say that in the year 2016, the average American could buy ________ times as many goods and services as the average American in 1950.

8

Which of the following is an example of a worker experiencing frictional unemployment?

A worker quits his job at the Post Office to find more interesting work.

Which of the following explains the changes in the U.S. adult male labor force participation rate since 1948?

D) Younger men are remaining in school longer as compared to the past.

Refer to Figure below. Which of the following is consistent with the graph depicted below?

New government regulations decrease the profitability of new investment.

If the CPI changes from 125 to 120 between 2015 and 2016, how did prices change between 2015 and 2016?

Prices decreased by 4%.

Financial markets and financial intermediaries comprise the financial system.

True

If inflationary expectations are increasing, we would expect that the nominal interest rate would also be increasing, holding all else constant.

True

The natural rate of unemployment consists of frictional unemployment plus structural unemployment.

True

Labor unions cause unemployment because the union contract wage is set

above the market wage, causing a surplus of labor.

In the United States in 2013, the Bureau of Economic Analysis began counting spending by firms and individuals on developing entertainment products as investment. This change will

add to GDP.

Which of the following would be the best measure of the cost of living?

consumer price index

To calculate GDP by the expenditure method, one must add

consumption spending, investment spending, government spending, and net exports.

The response of investment spending to an increase in the government budget deficit is called

crowding out.

Actual real GDP will be above potential GDP if

firms are producing above capacity.

Which of the following increases labor productivity?

inventions of new machinery, equipment, or software

A final good is one that

is purchased by its final user.

If inflation increases unexpectedly, then

lenders receive a lower real interest rate than they expected.

Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about

one-half to one percentage point.

The Bureau of Labor Statistics would categorize a retiree who is not working as

out of the labor force.

Full employment is not considered to be zero unemployment, because

people do not find jobs instantaneously.

The nominal interest rate equals the real interest rate ________ the inflation rate.

plus

If prices are rising on average, then

real GDP will be greater than nominal GDP in the years before the base year.

The period between a business cycle peak and a business cycle trough is called

recession

What does the PPI measure?

the average of the prices received by producers of goods and services at all stages of the production process

Liquidity refers to

the ease with which a financial security can be traded for cash.

Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time college students. This would cause

the labor force participation rate to decrease.

The nominal interest rate will be less than the real interest rate when

the rate of inflation is negative.

When deflation occurs,

the real interest rate is greater than the nominal interest rate.

Gross domestic product is calculated by summing up

the total market value of final goods and services produced in the economy during a period of time.