M2 Review

7. The inflation rate in year 2 equals

(GDP deflator in year 2 - GDP deflator in year 1/ GDP deflator in year 1) x 100

6. Which of the following is the correct formula for the GDP deflator?

(Nominal GDP/Real GDP) x 100

1. For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2.5 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving? a. $1.5 trillion and $2.5 trillion, respectively b. $2.5 trillion and $1.5 trillion, respectively c. $2.5 trillion and $2.5 trillion, respectively d. $1.5 trillion and $1.5 trillion, respectively

a. $1.5 trillion and $2.5 trillion, respectively

4. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus? a. 1,500, deficit b. 1,500, surplus c. 1,000, deficit d. 1,000, surplus

a. 1,500, deficit

1. In one day Alpha Cabinet Company made 40 cabinets with 320 hours of labor. What was Alpha Cabinet Company's productivity? a. 1/8 cabinet per hour b. 8 hours per cabinet c. 40 cabinets d. None of the above is correct.

a. 1/8 cabinet per hour

2. Which of the following changes in the price index produces the greatest rate of inflation: 12 to 15, 20 to 24, or 30 to 35? a. 12 to 15 b. 20 to 24 c. 30 to 35 d. All of these changes produce the same rate of inflation.

a. 12 to 15

5. If nominal GDP is $8 trillion and real GDP is $10 trillion, then the GDP deflator is a. 80, and this indicates that the price level has decreased by 20 percent since the base year. b. 80, and this indicates that the price level has increased by 80 percent since the base year. c. 125, and this indicates that the price level has increased by 25 percent since the base year. d. 125, and this indicates that the price level has increased by 125 percent since the base year.

a. 80, and this indicates that the price level has decreased by 20 percent since the base year.

2. Which of the following events could explain an increase in interest rates together with a decrease in investment? a. The government budget went from surplus to deficit. b. The government instituted an investment tax credit. c. The government reduced the tax rate on savings. d. None of the above is correct.

a. The government budget went from surplus to deficit.

12. The CPI and the GDP deflator a. generally move together. b. generally show different patterns of movement. c. always show identical changes. d. always show different patterns of movement.

a. generally move together.

8. If nominal GDP doubles and the GDP deflator doubles, then real GDP a. remains constant. b. doubles. c. triples. d. quadruples.

a. remains constant.

4. If in some year real GDP was $25 billion and the GDP deflator was 68, what was nominal GDP? a. $2.72 billion. b. $17 billion. c. $36.8 billion. d. $43 billion.

b. $17 billion.

2. In 2012, the imaginary nation of Platland had a population of 10,000 and real GDP of 42,000,000. During the year its real GDP per person grew by about 1.94%. Which of the following sets of growth rates is consistent with this growth in real GDP per person? a. 3% population growth and 4% real GDP growth b. 3% population growth and 5% real GDP growth c. 6% population growth and 4% real GDP growth d. 6% population growth and 5% real GDP growth

b. 3% population growth and 5% real GDP growth

1. All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit? a. Output will rise by more than it did when the previous unit was added. b. Output will rise but by less than it did when the previous unit was added. c. Output will fall by more than it did when the previous unit was added. d. Output will fall but by less then it did when the previous unit was added.

b. Output will rise but by less than it did when the previous unit was added.

4. If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then a. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP decreases. b. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP is unaffected. c. U.S. consumption decreases, U.S. net exports increase, and U.S. GDP increases. d. U.S. consumption decreases, U.S. net exports increase, and U.S. GDP is unaffected.

b. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP is unaffected.

2. Which of the following always uses prices and quantities from the same period? a. both nominal and real GDP. b. nominal GDP but not real GDP. c. real GDP but not nominal GDP. d. neither nominal or real GDP.

b. nominal GDP but not real GDP.

2. All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100 units this year, a. the increase in output was greater for this year than last year. b. the increase in output was greater last year than this year. c. the increase in output is the same in both years. d. None of the above is necessarily correct.

b. the increase in output was greater last year than this year.

2. In one day Madison Laundry washed 4,000 pounds of laundry with 5 workers who each worked 8 hours. What was its productivity? a. 4000 pounds of laundry b. 500 pounds of laundry per hour c. 100 pounds of laundry per hour d. None of the above is correct.

c. 100 pounds of laundry per hour

1. In 2012, the imaginary nation of Dorados had a population of 8,000 and real GDP of 3,000,000. During the year its real GDP per person grew by about 2.9%. Which of the following sets of growth rates is consistent with this growth in real GDP? a. 2% population growth and 6% real GDP growth b. 6% population growth and 2% real GDP growth c. 4% population growth and 7% real GDP growth d. 7% population growth and 4% real GDP growth

c. 4% population growth and 7% real GDP growth

1. Meredith is looking for work as a computer programmer. Although her prospects are good, she has not yet taken a job. Julie is looking for work in a steel mill. Every time she shows up for an interview, there are more people looking for work than there are openings. Someone waiting in line with her tells her it has been that way for a long time. a. Meredith and Julie are both frictionally unemployed. b. Meredith and Julie are both structurally unemployed. c. Meredith is frictionally unemployed, and Julie is structurally unemployed. d. Meredith is structurally unemployed, and Julie is frictionally unemployed.

c. Meredith is frictionally unemployed, and Julie is structurally unemployed.

1. Which of the following events could explain a decrease in interest rates together with an increase in investment? a. The government went from surplus to deficit. b. The government instituted an investment tax credit. c. The government reduced the tax rate on savings. d. None of the above is correct.

c. The government reduced the tax rate on savings.

3. When an American household purchases a bottle of Italian wine for $100, a. U.S. consumption does not change, U.S. net exports decrease by $100, and U.S. GDP decreases by $100. b. U.S. consumption does not change, U.S. net exports increase by $100, and U.S. GDP increases by $100. c. U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change. d. U.S. consumption increases by $100, U.S. net exports do not change, and U.S. GDP increases by $100.

c. U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change.

1. Net exports equal a. exports plus imports. b. imports minus exports. c. Y - (C + I + G). d. Y - (C - I - G).

c. Y - (C + I + G).

2. In a closed economy, if Y remained the same, but G rose, T rose by the same amount as G, and C fell but by less than the increase in T, what would happen to private and national saving? a. national saving would fall and private saving would rise b. national saving would rise and private saving would fall c. both national saving and private saving would fall d. None of the above is correct.

c. both national saving and private saving would fall

2. If changing consumer preferences increase the demand for satellite radios and decrease the demand for video cassette recorders, the economy will likely exhibit a. an increase in the natural rate of unemployment. b. a decrease in the natural rate of unemployment. c. frictional unemployment. d. efficiency wages.

c. frictional unemployment.

2. For an economy as a whole, a. wages must equal profit. b. consumption must equal income. c. income must equal expenditure. d. consumption must equal saving.

c. income must equal expenditure.

13. The CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator.

c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.

1. Which of the following is not a cause of frictional unemployment? a. the destruction of manufacturing jobs b. a worker leaving a job to find one with better benefits c. minimum-wage laws d. unemployment insurance

c. minimum-wage laws

1. The inflation rate is defined as the a. price level in an economy. b. change in the price level from one period to the next. c. percentage change in the price level from the previous period. d. price level minus the price level from the previous period.

c. percentage change in the price level from the previous period.

1. Which of the following is always measured in prices from a base-year? a. both nominal and real GDP. b. nominal but not real GDP. c. real but not nominal GDP. d. neither nominal nor real GDP.

c. real but not nominal GDP.

11. Two alternative measures of the overall level of prices are a. the inflation rate and the consumer price index. b. the inflation rate and the GDP deflator. c. the GDP deflator and the consumer price index. d. the cost of living index and nominal GDP.

c. the GDP deflator and the consumer price index.

3. In the base year, the GDP deflator is always a. -1. b. 0. c. 1. d. 100.

d. 100.

9. If real GDP is 5,100 and nominal GDP is 4,900, then the GDP deflator is a. 104.1 so prices are higher than in the base year. b. 104.1 so prices are lower than in the base year. c. 96.1 so prices are higher than in the base year. d. 96.1 so prices are lower than in the base year.

d. 96.1 so prices are lower than in the base year.

1. Which of the following statements about GDP is correct? a. GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services. b. Money continuously flows from households to firms and then back to households, and GDP measures this flow of money. c. GDP is generally regarded as the best single measure of a society's economic wellbeing. d. All of the above are correct.

d. All of the above are correct.

3. Which of the following would increase productivity? a. an increase in the physical capital stock per worker b. an increase in human capital per worker c. an increase in natural resources per worker d. All of the above are correct

d. All of the above are correct.

4. Which of the following is a determinant of productivity? a. human capital per worker b. physical capital per worker c. natural resources per worker d. All of the above are correct.

d. All of the above are correct.

1. Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198? a. 100 to 110 b. 150 to 165 c. 180 to 198 d. All of these changes produce the same rate of inflation.

d. All of these changes produce the same rate of inflation.

2. Bob is looking for work after school, but everywhere he fills out an application, the managers say they always have a lot more applications than open positions. Tom has a law degree. Several firms have made him offers, but he thinks he might be able to find a firm where his talents could be put to better use. a. Bob and Tom are both frictionally unemployed. b. Bob and Tom are both structurally unemployed. c. Bob is frictionally unemployed, and Tom is structurally unemployed. d. Bob is structurally unemployed, and Tom is frictionally unemployed.

d. Bob is structurally unemployed, and Tom is frictionally unemployed.

3. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,000, consumption equals 7,500, and government purchases equal 2,000. What is national saving? a. -500 b. 500 c. 2,000 d. None of the above is correct.

d. None of the above is correct.

14. The CPI differs from the GDP deflator in that a. the CPI is an inflation index, while the GDP deflator is a price index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the GDP deflator but not in the CPI. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the GDP deflator but not in the CPI.

d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the GDP deflator but not in the CPI.

2. The economy's inflation rate is the a. price level in the current period. b. change in the price level from the previous period. c. change in the gross domestic product from the previous period. d. percentage change in the price level from the previous period.

d. percentage change in the price level from the previous period.

2. If net exports is a negative number for a particular year, then a. the value of firms' inventories declined over the course of the year. b. consumption exceeded the sum of investment and government purchases during the year. c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year. d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.