Macroeconomics Midterm 1
If the CPI was 207 in 2003 and 215 in 2008, what pay raise would someone who earned $40,000 income in 2003 have to earn in order to keep her purchasing power constant?
$1,546
Refer to Table 7-6. Suppose that a very simple economy produces three goods: cameras, legal services, and books. Suppose the quantities produced and their corresponding prices for 2006 and 2009 are shown in the table above. What is real GDP in 2006, using 2009 as the base year?
$11,200
Refer to Table 7-15. Based on the table above, what is personal income for this economy?
$2,030 billion
If the CPI in 2007 was 207 and the CPI in 2008 was 215, what was the inflation rate between 2007 and 2008?
3.9%
In the circular-flow diagram, who supplies factors of production in exchange for income?
Households
Refer to Figure 9-1. Based on the graph of the labor market above, if a minimum wage is set at $5 per hour, which of the following will occur? - The unemployment rate will fall. - The level of unemployment will rise, but the percentage of the labor force unemployed will not change. - The unemployment rate will rise. - None of the above will occur.
None of the above will occur.
Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah experiencing?
Sarah is not experiencing unemployment of any kind because she is not currently part of the labor force.
How are intermediate goods treated in the calculation of GDP?
Their value is not counted separately, but included as part of the value of the final good for which they are an input.
The equilibrium wage in a local labor market is $6 per hour. If a minimum wage of $8 per hour is imposed, which of the following will occur?
There will be an increase in unemployment.
An example of a transfer payment is
a welfare payment.
Which of the following would increase GNP in the United States?
an increase in the production of U.S.-owned General Motors cars made in Mexico
The flow of funds from ___________ into the financial system makes it possible for government and firms to borrow.
households
Which of the following are not considered of "final goods," as used in the definition of GDP?
intermediate goods
The deflation of the 1930s impacted the U.S. economy because it led some consumers to ________ and because it ________.
postpone purchases while they waited for prices to fall even lower; increased the burden on borrowers.
As the economy nears the end of an expansion, interest rates usually ________ and wages raise more ________ than prices.
rise; rapidly
The CPI is also referred to as
the cost-of-living index.
In calculating the CPI
the market basket does not include large equipment purchased by business firms.
Which of the following is included in the economist's definition of investment?
the purchase of new machines, factories, or houses
If the minimum wage is set above the market-determined clearing wage
the unemployment rate will be higher than it would be without a minimum wage.
Labor unions cause unemployment because the union contract wage is set
above the market wage, causing a surplus of labor.
To calculate personal income from national income, which of the following must be done by the BEA?
add government transfer payments
As the economy nears the end of an expansion, which of the following occurs? - Interest rates are usually rising. - Wages are usually rising faster than prices. - The profits of firms will be falling. - all of the above
all of the above
Government policies can help to reduce the levels of frictional and structural unemployment, but they can also help to increase them. Which of the following policies can cause an increase in the levels of frictional or structural unemployment? - increasing the length of time that the unemployed can receive payments from the government - passing legislation that makes it more difficult for firms to fire workers - increasing the minimum wage - all of the above
all of the above
The "normal" underlying level of unemployment in the economy is - the sum of structural unemployment and frictional unemployment. - the full-employment rate of unemployment. - the natural rate of unemployment. - all of the above
all of the above
Which of the following is counted in the gross private domestic investment category used by the Bureau of Economic Analysis when measuring GDP? - business fixed investment - residential investment - changes in business inventories - all of the above
all of the above
Which of the following would be considered a factor of production? - capital - natural resources - entrepreneurship - all of the above
all of the above
Which is the largest component of GDP?
Consumption
If we add up the value of every final good and service produced in the economy, we must get a total that is exactly equal to the value of
all of the income in the economy.
How does the inflation rate behave during the business cycle?
During expansions, the inflation rate usually increases.
The ________ is a measure of the price level and is calculated by dividing ________ by ________ and multiplying by 100.
GDP deflator; nominal GDP; real GDP
Which of the following would reduce the labor force participation rate, all else equal?
an increase in the working-age population
Household production and the underground economy
are important but unaccounted for in the Commerce Department's estimate of GDP.
Attempts by the government to stabilize the economy were favored by public opinion
beginning in the 1930s.
At full employment
cyclical unemployment is zero.
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.
lower; more stringent
In an economy with rising prices, compared to the base year,
nominal GDP is larger than real GDP in years after the base year.
Disposable personal income is defined as
personal income less personal taxes.
If prices are rising on average, then
real GDP will be greater than nominal GDP in the years before the base year.
The measure of production that values output using base-year prices is called
real GDP.
The drawback to calculating real GDP using base-year prices is that
relative prices change over time and these are not reflected in base-year prices, and this distorts GDP.
Complete the following sentence: Total income in the economy equals the sum of wages, interest, _________ and ________.
rent; profit
The total national income actually received by a country's residents is
smaller than the value of GDP.
Suppose that the base year is 2000 and we want to calculate real GDP for 2009. Which procedure would you use?
Multiply the quantities in 2009 by the prices in 2000, and add up the results.
Which of the following is the correct formula for calculating the unemployment rate?
Number of unemployed/Labor Force x 100
Which of the following is counted in GDP? - the value of do-it-yourself work - the value of leisure - the value of goods and services produced in the underground economy - the cost of a speed boat purchased by drug smugglers
the cost of a speed boat purchased by drug smugglers
Changes in the stability of the economy during the 1950-2007 period were attributed to
the increasing importance of services and the declining importance of goods.
With respect to statistics on the labor market, we can say that
the labor force is the sum of the employed and unemployed.
Which of the following is a macroeconomic study? - the study of how households and businesses make choices - the study of how households and businesses interact in markets - the study of how the government attempts to influence the choices of households and businesses - the study of how fast prices in general are increasing
the study of how fast prices in general are increasing
Real GDP is
the value of goods and services evaluated at base year prices.
You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that inflation will be 4% over that year. If inflation is instead 3% over that year, which of the following is true?
The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation.
True or false, deflation benefits lenders.
True
Refer to Table 7-6. Suppose that a very simple economy produces three goods: cameras, legal services, and books. Suppose the quantities produced and their corresponding prices for 2006 and 2009 are shown in the table above. What is real GDP in 2009, using 2009 as the base year?
$11,790
Refer to Table 7-6. Suppose that a very simple economy produces three goods: cameras, legal services, and books. Suppose the quantities produced and their corresponding prices for 2006 and 2009 are shown in the table above. What is the GDP deflator in 2009 if 2009 is the base year?
100
Monthly expenditures for a family of 4 in 2008 averaged $1,400. In 2009, the cost of the same purchases was $1,500. If 2008 is the base year, what was the CPI in 2009?
107
If nominal GDP in a given year is $11,000 billion and real GDP is $10,000 billion, then the GDP price deflator in that year equals
110
If the inflation rate is 4 percent and the nominal interest rate is 6 percent, then the real interest rate is
2 percent, which is the difference between the nominal interest rate and the inflation rate.
If the GDP deflator rises from 185 to 190, what is the rate of inflation between the two years?
2.7%
Refer to Table 8-1. Suppose that the data in the table above reflect price levels in the economy. What is the inflation rate between 2008 and 2009?
2.9%
A car that is produced in 2010 is not sold until 2011. According to the definition of GDP, in which year's GDP should it be counted?
2010
Which of the following is an example of a worker experiencing cyclical unemployment?
A freightliner employee that got laid off because of the recession of 2007-2009.
Which of the following goods and services would be excluded from personal consumption expenditures in the Bureau of Economic Analysis (BEA) statistics?
A new house
Suppose that you are available for work but have not looked for a job for at least the last four weeks because you believe that no jobs are available. You would then be counted as
a discouraged worker.
Which of the following would not be included in the expenditure category called investment expenditures?
a purchase of shares of preferred stock
Which of the following individuals would be most negatively affected by anticipated inflation?
a retired railroad engineer who receives a fixed income payment every month
The Business Cycle Dating Committee defines a recession as
a significant decline in activity visible in industrial production, employment, real income, and wholesale/retail trade lasting more than a few months.
Growth in the economy is almost always measured as
growth in real GDP.
Of the eight categories in the CPI market basket, which three categories make up more than 75 percent of the basket?
housing, transportation, and food
Assuming that the United States is the domestic economy, ________ are goods and services produced by ________ and purchased by ________.
imports; foreign countries; the United States
Gross domestic product in the economy is measured by the
dollar value of all final goods and services produced in the economy.
Which types of goods are most likely to be affected by the business cycle?
durable goods
The labor force is the sum of
employed workers and unemployed workers.
If your nominal wage rises more slowly than the price level, we can say your real wage has ________ and the purchasing power of a dollar has ________.
fallen; fallen
Marla is an architect who is designing a home for Chuck. Chuck is paying Marla $150 per hour to design his new home. When Chuck and Marla get married, Marla continues to work on designing the home, but she no longer charges Chuck for her work. As a result, GDP ________ because ________.
falls; Marla's architectural design services are no longer bought by Chuck once they're married
Refer to Table 8-7. Looking at the table above, real wages ________ from 2007 to 2008, and real wages ________ from 2008 to 2009.
fell; rose
During the early stages of a recovery
firms are usually reluctant to hire new employees.
If inflation is completely anticipated,
firms lose because they incur menu costs.
Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be experiencing ________ unemployment in the near future.
frictional
When the economy is at full employment, which types of unemployment remain?
frictional and structural
The natural rate of unemployment is made up of
frictional and structural unemployment.
Establishing a state employment agency that speeds up the process of matching unemployed workers with unfilled jobs is an attempt to lower
frictional unemployment.
The short-term unemployment that arises from the process of matching workers with jobs is called
frictional unemployment.
In many developing countries, the informal sector is ________ because taxes are ________ and government regulations are ___________.
large; high; extensive
If inflation increases unexpectedly, then
lenders receive a lower real interest rate than they expected.
Over time, prices may change relative to each other. To allow for this, the Bureau of Economic Analysis calculates
real GDP and the price deflator using chain weights.
Two important trends in the labor force participation rates of adults aged 20 and over in the United States since 1950 are the _________ labor force participation rate of adult women and the __________ labor force participation rate of adult men.
rising; falling
In calculating GDP, which levels of government spending are included in government purchases?
spending by federal, state, and local governments
By offering training to workers whose firms laid them off because of competition from foreign firms, the federal government is attempting to reduce
structural unemployment.
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called
structural unemployment.
Increases in the minimum wage will
increase teenage unemployment.
When a consumer purchases a new computer, how is that purchase counted in GDP?
By counting only the value of the computer and ignoring the value of the components
In the equation that sums up the information on the components of GDP, Y = C + I + G + NX, which component has the largest dollar value?
C
In the U.S. economy today, how long does the typical unemployed person stay unemployed?
less than 5 weeks
A full-time student who is not working is categorized as
not in the labor force.
Refer to Table 7-6. Suppose that a very simple economy produces three goods: cameras, legal services, and books. Suppose the quantities produced and their corresponding prices for 2006 and 2009 are shown in the table above. What is the nominal GDP in 2009 when 2006 is the base year?
$11,790
Refer to Table 7-13. Based on the table above, what is national income for this economy?
$2,950 billion
Suppose the federal minimum wage in 2006 and 2007 was $6, and $6.25 respectively. CPI in these two years was 201.6 and 207.3 respectively. Assume that 1983 is the base year for CPI construction. Fill in the blanks. The real minimum wage in 2006 and 2007 expressed in 1983 dollars was _________________ respectively and between these two years minimum wage earners saw a (an) _____________ in the purchasing power of the minimum wage.
$2.98 and $3.01; increase
Emily is a writer. She buys pens and paper for $20 and writes a 500-page novel that she sells to a publishing company for $500,000. If the publisher prints 1 million copies that sell for $25 each, what is the contribution to GDP of Emily's novel?
$25 million
Refer to Table 7-1. Consider the table of production and price statistics for a small economy in 2009. If the economy only produces the four goods listed below, what is GDP for 2009?
$428,000
The CPI in 1990 was 131, and the CPI in 2008 was 215. If you earned a salary of $40,000 in 1990, what would be a salary with equivalent purchasing power in 2008?
$65,649
If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is
-3%.
To obtain prices of a representative group of goods and services, the Bureau of Labor Statistics (BLS) conducts a monthly survey of __________ households nationwide on their spending habits. The results of this survey are used to construct a market basket of _________ goods and services purchased by the typical urban family of four.
30,000; 211
You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that year rises from 180 to 190. What is the real rate of interest you will earn?
4.4%
If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation will be 2%, what nominal rate of interest will you charge?
5%
The Current Population Survey, conducted by the U.S. Bureau of the Census and often referred to as the household survey, is a sample of ___________ households, and asks about the employment status of everyone in the household ______________ and older.
60,000; 16 years of age
Refer to Table 8-9. Looking at the table above, what is the rate of growth of real average hourly earnings from 2008 to 2009?
7.7%
Refer to Table 8-4. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2004 is the base year, then what is the CPI for 2009?
87.5
How does the Bureau of Economic Analysis of the U.S. Department of Commerce measure GDP?
By adding the value in dollar terms of all of the final goods and services produced domestically.
Which of the following is true about the consumption component of U.S. GDP last year?
Consumer spending on services was greater than the sum of spending on durable and nondurable goods.
Which of the following causes the unemployment rate to understate the true extent of joblessness?
Discouraged workers are not counted as unemployed.
Consumption spending is $4.5 billion, gross private domestic investment is $3 billion, and government expenditures are $2 billion. If GDP is $14 billion, which of the following could be true regarding exports and imports in the economy? - Exports are $15 billion, and imports are $10.5 billion. - Exports are $9 billion, and imports are $6 billion. - Exports are $4.5 billion, and imports are $2 billion. - Exports are $6 billion, and imports are $8.5 billion.
Exports are $15 billion, and imports are $10.5 billion.
When accounting for exports and imports in GDP, which of the following is correct?
Exports are added to the other categories of expenditures.
Which of the following is not true of GDP?
GDP includes both intermediate and final goods.
What happens if we measure GDP by adding up the value of every good and service produced in the economy?
GDP is overestimated because of double counting.
National income is equal to
GDP minus depreciation.
When a significant fraction of domestic production is done by firms owned by foreigners, a country's difference between GDP and GNP is as follows:
GDP will be much larger than GNP.
If Americans still worked 60 hour weeks, as they did in 1890,
GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher.
Which of the following accurately describes an effect of hurricane Katrina on GDP? - GDP would increase reflecting the decrease in production that occurred during the storm and the productive capacity lost in the storm. - GDP would increase well-being. - GDP would increase reflecting the costs of cleanup. - GDP would decrease reflecting the costs of cleanup.
GDP would increase reflecting the costs of cleanup.
Which of the following is not a reason why the U.S. economy has been more stable since 1950?
Goods have become a larger fraction of GDP and services have become a smaller fraction of GDP.
Which of the following is a true statement about real and nominal GDP? - Increases in average prices do not affect the calculation of nominal GDP. - If nominal GDP increases from one year to the next, we know that production of goods and services has risen. - If real GDP increases from one year to the next, we know that production of goods and services has risen. - Nominal GDP is a better measure than real GDP in comparing changes in the production of goods and service year after year.
If real GDP increases from one year to the next, we know that production of goods and services has risen.
When the economy reaches a trough in a business cycle, which of the following will occur?
Income and production will rise, but employment will continue to fall.
Which of the following is a true statement about the impact of World War II on the U.S. economy? - U.S. GDP decreased dramatically from 1941 to 1945. - Increased production of tanks, ships, planes, and munitions accounted for most of the increase in GDP. - Less than 10% of the labor force was in the military or producing war goods. - The war time years were a period of prosperity for U.S. consumers.
Increased production of tanks, ships, planes, and munitions accounted for most of the increase in GDP.
Which of the following is not a cost posed by inflation?
Inflation reduces the affordability of goods and services to the average consumer.
During an expansion, how do inflation and unemployment typically change?
Inflation rises and unemployment falls.
Relative to the household survey, which of the following is a strength of the establishment survey? - It provides better information on the number of persons self-employed than the household survey. - It provides information on unemployment, which the household survey does not provide. - It is determined by actual payrolls, rather than by the unverified answers of the household survey. - all of the above
It is determined by actual payrolls, rather than by the unverified answers of the household survey.
Which of the following is not a shortcoming of GDP as a measure of welfare?
It only counts final goods and services and not intermediate goods.
How would most economists respond to the following comment: Not counting household production or production in the underground economy is a serious shortcoming of GDP.
Most economists would answer "no" because these types of production do not affect the most important use of the GDP measure, which is to see how the economy is performing over short periods of time.
Between 2008 and 2009, if an economy's exports rise by $8 billion and its imports fall by $8 billion, by how much will GDP change between the two years, all else equal?
Net exports will increase GDP by $16 billion.
Which of the following is true about the government purchases component of U.S. GDP last year?
Purchases by state and local governments are greater than purchases by the federal government.
Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant?
Real GDP
Comparing the 1950-2007 period with other periods, how would you describe the business cycle?
Recessions were milder and the economy was more stable.
Which of the following statements best characterizes the views of economists with respect to government stabilization policies?
Some economists believe that government policies have played a key role in stabilizing the economy, but other economists disagree.
Gross domestic product is best defined as
The market value of all final goods and services produced in a country during a period of time.
If you are considering to borrow a student loan, which of the following situations should you consider as most favorable for you as a borrower? - The nominal interest rate is 2% and the expected annual inflation rate is 1%. - The nominal interest rate is 15% and the expected annual inflation rate is 3%. - The nominal interest rate is 15% and the expected annual inflation rate is 18%. - The nominal interest rate is 2% and the expected annual inflation rate is
The nominal interest rate is 15% and the expected annual inflation rate is 18%.
Refer to Table 7-4. Given the information above, what can we say has happened in the economy from 2008 and 2009?
The price level has risen.
What would be the impact of counting as unemployed both discouraged workers and those who work part-time but would prefer to work full-time?
The unemployment rate would increase.
How have the establishment of unemployment insurance and the creation of other transfer programs that provide funds to the unemployed contributed to business cycle stability?
They have made it possible for workers who lose their jobs to have higher incomes and, therefore, to spend more than they would otherwise.
The "misery index" gives a rough measure of the state of the economy by
adding together the inflation and unemployment rates.
A defining characteristic of the business cycle is
alternating periods of expansion and recession.
A wage higher than the market wage paid by a firm in order to increase worker productivity is
an efficiency wage.
Investment spending includes spending on
changes in business inventories.
If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then
changes in the CPI overstate the true rate of inflation.
A recession begins with a(n) ________ in spending by firms on capital goods and a(n) ________ in spending on durable goods by households.
decrease; decrease
Recessions cause the inflation rate to _________, and they cause the unemployment rate to_________. Question options:
decrease; increase
Which of the following do we subtract from GNP to obtain NNP?
depreciation
As the value of a country's GDP increases, the country is likely to
devote more resources to pollution reduction.
Recently, which of the following groups was smallest? - the unemployed - people who were not in the labor force and not available for work - discouraged workers - the number of people in the labor force
discouraged workers
The best measure of the income households actually have available to spend is
disposable personal income.
During the last half of the twentieth century, the U.S. economy experienced
long expansions, interrupted by relatively short recessions.
Personal income is defined as
national income less retained earnings plus transfer payments and plus interest on government bonds.
Disposable personal income is equal to
national income minus corporate retained earnings plus government transfer payments minus personal tax payments
Using the year 2000 as the base year, and assuming that prices during the 1990s were lower on average than prices in 2000, we can conclude that
nominal GDP was lower than real GDP in the 1990s.
Economic variables that are calculated in current year prices are referred to as __________ variables, while variables that have been corrected to account for the effects of inflation are _________ variables.
nominal; real
Among the following, who is counted by the BLS as unemployed? - A person working part-time but prefers to have a full-time job. - A person has stopped actively looking for a job after have trouble finding one. - A worker who believes she is underpaid. - none of the above
none of the above
If you are available for work and have looked for a job at some point during the previous twelve months, but have not actively looked during the previous four weeks, you are considered
not in the labor force.
Which of the following is counted in this year's GDP?
only this year's production of goods and services
Typically, when will the National Bureau of Economic Research (NBER) announce that the economy is in a recession?
only well after the recession has begun
If real GDP increases we know for sure that
output has risen
If the GDP deflator has a value of 105.0, then
prices have risen 5% since the base year.
During the expansion phase of the business cycle,
production increases.
Which of the following is a better measure of the average prices of all goods and services included in GDP? - the consumer price index - the producer price index - the GDP deflator - the inflation rate
the GDP deflator
Since 1950,
the average length of expansions in the United States have become longer as compared to before 1950.
Which market basket below specifically targets intermediate goods? - the basket used by the consumer price index - the basket used by the GDP deflator - the basket used by the producer price index - all of the above
the basket used by the producer price index
From a trough to a peak, the economy goes through
the expansionary phase of the business cycle.
For the recessions in the United States since the 1950s,
the inflation rate falls on average by about 2.5 percentage points 12 months after a recession begins.
Which of the following is not a reason that the economy is considered to be more stable in the 1950- 2007 period than in other periods? - the increasing importance of services and the declining importance of goods - the establishment of unemployment insurance programs - the use of active government policies to stabilize the economy - the introduction of a minimum wage rate
the introduction of a minimum wage rate
We say that the economy is at full employment if the unemployment rate is equal to
the natural rate of unemployment.
During a deflationary period,
the nominal interest rate is less than the real interest rate.
The real interest rate equals
the nominal interest rate minus the inflation rate.
The stated interest rate on a loan is
the nominal interest rate.
In business cycles,
the peak is the end of the expansion.
The inflation rate is
the percentage change in the GDP deflator from one year to the next.
Computation of the CPI assumes that households buy the same market basket of products each month. For this reason, one of the following is irrelevant in calculating the CPI. Which one? Question options:the prices of the products purchased in the base yearthe prices of the products purchased in the current yearthe quantities of the products purchased in the base yearthe quantities of the products purchased in the current year
the quantities of the products purchased in the current year
Home Depot sells new and used doors to contractors who build new homes. Home Depot also sells new and used doors to homeowners. Which of the following would be counted in GDP? - the sale of a used door to a homeowner - the sale of a new door to TapKon construction for installation into a new home - the sale of a used door to TapKon construction for installation into a new home - the sale of a new door to homeowner
the sale of a new door to homeowner
Changes in the CPI overstate the true inflation rate due to four "biases." If apple prices rise rapidly during the month while orange prices fall, consumers will reduce their apple purchases and increase their orange purchases. Which of the four biases is concerned with this tendency?
the substitution bias
What is outlet bias?
the tendency for households to spend their money at discount stores as prices rise
Which of the following groups is included in the labor force? - the unemployed - retirees, homemakers, and full-time students - people who could have a civilian job but are on active military service, in prison, or in mental hospitals - none of the above
the unemployed
Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job,
the unemployment rate increased.
Since 1950s, the behavior of the annual unemployment rate in the United States demonstrated that
the unemployment rate rises during recessions and falls during expansions.
How would employment statistics be affected if they included people in the military?
the unemployment rate would decrease. The working-age population would remain
The circular flow diagram shows that
the value of total income is equal to the total value of expenditures on final goods and services.
When do households and firms typically increase their debts substantially?
toward the end of an expansion
If the consumer price index was 80 in 1979 and 160 in 1999, then average prices in 1999 were
twice as high in 1999 as in 1979.
An important conclusion to draw from the circular-flow diagram is that
we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of total income.
