Macroeconomics midterm

Before 1970 the United States generally had a trade _____ and since 1970 the United States has generally run a trade _____.

surplus; deficit

Most economists agree that ______ are the single most important source of productivity improvements.

technological advances

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low is known as

the Fisher effect.

An example of a government policy to increase physical capital formation is

the construction of an interstate highway system.

The demand for labor depends on ______ and _______.

the marginal product of labor; the price of output produced

Human capital is

the talents, training, and education of workers.

Shoe leather costs include the ______ due to the more frequent trips to the bank, the new cash management systems and the expanded employment in banks that inflation causes.

time and effort that are used up

Real GDP per person equals average labor productivity

times the share of population employed.

GDP can be measured as each of the following except

total business revenues.

Intermediate goods and services are ______ production and ______ counted in GDP.

used up in the process of; are not

A firm's revenue from selling its product minus the cost of inputs purchased from other firms is called

value added.

Labor income includes

wages, salaries, and earnings of the self-employed.

If workers and employers agree to a three-year wage contract under the expectation of 5 percent inflation, and inflation turns out to be 3 percent, then

workers gain and employers lose.

The nation of Potchatoonie produces hockey pucks, cases of root beer, and sandals. The following table provides data on prices and quantities of the three goods in years 2017 and 2020.

year Nom Real 2017 $ 8500 8500 2020 8625 7825

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process: Name of Company Revenues Cost of Purchased Inputs Citrus Growers Incorporated $ 0.75 $ 0 Florida Jam Company 2.00 0.75 The Corner Store 2.50 2.00 What is the value added of Citrus Growers Incorporated?

$0.75

Congress should not reduce capital gains taxes without also providing tax breaks for lower-income people.

Normative Statement

The Federal Reserve should raise interest rates to keep inflation at an acceptably low level.

Normative Statement

Deflation is a situation in which the

prices of most goods and services are falling over time

Depression and lost self-esteem are examples of the ______ costs of unemployment, while the lost income and tax revenue are examples of the ______ costs of unemployment.

psychological; economic

Lao and Lamar fill egg cartons with eggs. Lao just started the job and can fill only 25 cartons an hour. Lamar has significant on-the-job experience and can fill 50 cartons an hour. Both Lao and Lamar work 50 hours a week. Lao's average weekly productivity is ______ cartons; Lamar's average weekly productivity is ______ cartons; and as a team their average weekly productivity is ______ cartons.

1,250; 2,500; 1,875

A consumer expenditure survey reports the following information on consumer protein spending: 20192020 PriceQuantityPriceQuantityFish$ 55$ 77Chicken$ 310$ 412Beef$ 67$ 510 Using 2019 as the base year, by how much does a "cost of protein" index increase between 2019 and 2020?

13.4 percent

In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs but wanted jobs. What is the unemployment rate in this town?

13.7 percent

Over the period from 1870 to 2010, the growth of real GDP per capita tended to be more rapid between _____, particularly for _____.

1950-2010; Japan

Inflation was a major problem in the United States during the

1970s

______ start new economic enterprises, while ______ run the enterprises on a day-to-day basis.

Entrepreneurs; managers

All of the following describe economic conditions during the Great Depression in the United States except:

High rates of inflation

Major macroeconomic questions include all of the following except

How do monopoly firms set prices and determine quantities to produce?

In living standards in a country, as measured by output per person, decrease, then total output must have

Increased more slowly than population increased

______ is an increase in the price level, while ______ is an increase in the price of one good in comparison to other goods and services.

Inflation; a relative price increase

Who from among the following would be classified as unemployed?

Jack Little, a 21-year-old new college graduate actively looking for his first job

he following is a report from a BLS survey taker: "There were 65 people in the houses I visited, 10 of them were children under 16, 25 people had full-time jobs, and 5 had part-time jobs. There were 10 retirees, 5 full-time homemakers, 5 full-time students over age 16, and 2 people who were disabled and cannot work. The remaining people did not have jobs, but all said they would like one. One of these people had not looked actively for work for 3 months, however." Find the labor force, the unemployment rate, and the participation rate implied by the survey taker's report.

Labor force: 32 people Unemployment rate: 6.25% Participation rate: 58.18%

The process of converting current dollar values into real terms is called ______, while the process of adjusting nominal quantities to maintain their purchasing power is called ______.

deflating; indexing

A cost of aggregation is that

details about individual households and firms are lost.

To aggregate 300 tons of steel, 5,000 bushels of wheat, and 1 million barrels of crude oil, economists add together the _____ of the three products

dollar value

Each person who is 16 years or older is considered to be in one of the following categories:

employed, unemployed, or out of the labor force.

A trade surplus occurs when

exports exceed imports.

One factor that contributed to the growth in the share of population employed in the United States between 1960 and 2000 was increased

female labor force participation.

People who enjoy high standards of living usually have all of the following EXCEPT:

freedom from scarcity.

One trend in labor markets is

a slowdown in real wage growth in the United States since 1973.

Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a real return of 4 percent per year. Instructions: Enter your responses as whole numbers. a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 109 in one year and 118.8 in two years. What nominal rate of interest should Frank charge Sarah? b. Suppose Frank and Sarah are unsure about what the CPI will be in two years. How should Frank index Sarah's annual repayments to ensure that he gets an annual 4 percent rate of return?

a. Inflation is expected to be (109 − 100)/100 = 9 percent in the first year and (118.8 − 109)/109 = 9 percent in the second year. If Frank charges Sarah a nominal interest rate of 13 percent, he will earn a real return of 4 percent per year (13 percent nominal interest rate − 9 percent inflation rate). b. To ensure a 4 percent annual return on the loan, Frank and Sarah should agree that Sarah will pay a nominal interest rate in each year equal to 4 percent plus whatever the inflation rate turns out to be.

The growth of real GDP per person in the United States between 1960 and 2019 was the result of

growth in both average labor productivity and the share of population employed.

Although GDP is not the same as economic well-being, high levels of GDP are positively correlated with all of the following except

higher rates of infant mortality.

The "true" costs of inflation to an economy include all of the following except

higher relative prices.

The four categories of final users of GDP are

households, firms, governments, and the foreign sector.

Governments contribute to increased average labor productivity in each of the following ways except by

imposing taxes on wages.

Government support of basic research by funding scientists through the National Science Foundation is an example of a government policy to promote economic growth by

improving technology.

Increasing the capital available to the workforce, holding other factors constant, tends to ______ total output while ______ average labor productivity.

increase; increasing

The average annual growth rates of labor productivity from 1947 to 1973 were ______ the average rates over the period from 1973 to 1995.

more rapid than

Inflation-protected bonds guarantee investors

no real wealth loss in the event of unexpectedly high inflation.

The real interest rate equals the

nominal interest rate minus the inflation rate.

All of the following are nominal quantities except the

number of houses built in one month.

The standard of living in an economy is best measured by

output per person

The marginal product of labor is the additional

output produced by one more worker.

Aggregation means the

adding up of individual economic variables to obtain economy wide totals.

Hyperinflation is

an extremely high rate of inflation.

Entrepreneurs contribute to increased average labor productivity in each of the following ways except by

assigning workers to jobs.

Long-run increases in living standards, as measured by real GDP per person, are primarily the result of increases in

average labor productivity.

The CPI is a measure of the

average level of prices relative to prices in the base year.

The key indicator of a country's living standard and economic well-being is

real GDP per person.

To increase future living standards by pursuing higher current rates of investment spending, an economy must

reduce current rates of consumption spending.

Who of the following would be considered a discouraged worker?

Frank would like to work but has not looked for work because he believes no jobs are available.

A government is running a budget deficit if

government revenue is less than government spending.

In 2019, Laure Cecil sells a five-year-old car to Used Car, Incorporated for $3,750. In the same year, Used Car, Incorporated resells the car to Chas Nealy for $5,100. What is the contribution of these transactions to GDP in the year 2019?

$1,350

Assume an economy produces only hamburgers and hot dogs and the base year is 2019. Quantities Produced Prices ---------------2019 2020 2019 2020 Hamburgers 2000 3000 $2 $3 Hot Dogs 3000 4000 $1 $1.50 Given the data in the table above, what is the value of real GDP in 2020?

$10,000

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract and by another 3 percent in the third year. The CPI is 1.00 in the first year, 1.07 in the second year, and 1.15 in the third year. What dollar wage must be paid in the third year?

$12.20 Since the real wage is supposed to increase by 3 percent in the second year, the real wage in year two must be $10.30 ($10 × 1.03) per hour. Similarly, the real wage should also increase by 3 percent in the third year, so the real wage in year 3 must be $10.609 ($10.3 × 1.03) per hour. In order to find the nominal wage in year three, we must index this real wage to adjust for inflation. The nominal wage in year 3 must be $12.20 ($10.609 × 1.15).

In econland total output is $7 billion, population equals 400,000 people, and, of these, 350,000 are employed workers. Output per person in econland equals - and average labor productivity equals -.

$17,500; $20,000

If an automobile manufacturer pays $200 for a car windshield, $400 for four car tires, $100 for a car radio, and sells cars made with these parts for $20,000, then each car the automobile manufacturer sells contributes how much to GDP?

$20,000

An economy produces only 500,000 tables valued at $100 each. Of these, 100,000 are sold to consumers, 200,000 are sold to businesses, 100,000 are sold to the government, and 50,000 are sold abroad. No tables are imported. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is the value of GDP?

$50 million

If real GDP per person in a country equals $40,000 and 60 percent of the population is employed, then average labor productivity equals

$66,667. $40,000/0.60 = $66.667.

Which of the following is an example of an investment in human capital?

A firm pays for workers to take college classes.

Which of the following is an example of a capital good?

A metal-stamping machine used to produce cars sold to an automaker

Calculate the four components of aggregate expenditure and GDP for the following economy using data from the table below. Consumption expenditures $600 Exports $75 Government purchases of goods and services $200 Construction of new homes and apartments $100 Sales of existing homes and apartments $200 Imports $50 Beginning-of-year inventory stocks $100 End-of-year inventory stocks $50 Business fixed investment $100 Government payments to retirees $100 Household purchases of durable goods $150

Consumption expenditures: $ 600 Investment expenditures: $ 150 Government Purchases: $ 200 Net Exports: $ 25 GDP: $ 975

A reduction in the capital gains tax (the tax on profits made in the stock market) would lead to a 10 to 20 percent increase in stock prices.

Positive Statement

If the Federal Reserve raises interest rates, demand for housing is likely to fall.

Positive Statement

Stock prices are likely to fall over the next year as the economy slows.

Positive Statement

The fictitious country "Alpha" has a population of 40 million people, of which 32 million are employed workers. The real GDP of Alpha is $18,400 million. Find the average labor productivity and the share of the population that is employed.

Since the real GDP of $18,400 million was produced by 32 million workers, the average labor productivity of Alpha $18,400/32 = $575 per person. The share of the population employed is 80% (= 32/40).

Government purchases include all of the following except

Social Security benefits paid by the federal government.

The value of output was $100 billion in Northland and $200 billion in Southland. The population of Northland was 50 million and the population of Southland was 30 million. There were 30 million employed workers in Northland and 20 million employed workers in Southland. Average labor productivity was higher in - and the standard of living was -.

Southland; higher in southland

The typical consumer's food basket in the base year 2015 is as follows: 30 chickens at $3 each 10 hams at $6 each 10 steaks at $8 eachA chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each, and the price of steaks is unchanged.a. Calculate the change in the "cost-of-eating" index between 2015 and 2016.

The cost of the basket in 2015 is $90 + $60 + $80 = $230. In 2016, the cost is $150 + $70 + $80 = $300. The official "cost of eating" has increased by: (300−230)230=70230(300−230)230=70230 = 0.304, or 30.4% between 2015 and 2016.b. Since two chickens now cost more than one ham, people will switch from 30 chickens to 15 hams, for a total ham consumption of 25. The cost of the food basket in 2016 is now (25 hams × $7 per ham) + (10 steaks × $8 per steak) = $255. The true increase in the cost of eating is: (255−230)230=25230(255−230)230=25230 = 0.109, or 10.9%.This is a much lower increase in the cost of eating than the official estimate of 30.4%. The overestimate of inflation in the cost of eating reflects substitution bias.

Macroeconomic policies are government policies designed to affect

The performance of the economy as a whole.

The market interest rate in Alpha is 7 percent, and the market interest rate in Beta is 10 percent; the inflation rate in Alpha is 3 percent, and inflation rate in Beta is 8 percent. Which of the following statements is true?

The real interest rate is higher in Alpha, but the nominal interest rate is higher in Beta. In Alpha, the real interest rate is 7 percent − 3 percent = 4 percent. In Beta, the real interest rate is 10 percent − 8 percent = 2 percent. Thus, the real interest rate is higher in Alpha and the nominal interest rate is higher in Beta.

Suppose that the total production of an economy consists of 10 oranges and 5 candy bars, each orange sells for $0.20, and each candy bar sells for $1. Which expression of the output of this economy is most consistent with the concept of GDP?

This economy produces $7 worth of food.

Suppose the nominal median household income for a family of four in the United States was $24,218.00 in 1985, $35,078.00 in 1995, $48,726.00 in 2005, and $51,676.00 in 2015.You will need to know that the CPI (multiplied by 100, 1982-1984 = 100) was 107.8 in 1985, 152.6 in 1995, 195.5 in 2005, and 218.3 in 2015.

Year Nominal Income CPI Real Income 1985 $24,218.00 107.8 $22,465.68 1995 $35,078.00 152.6 $22,986.89 2005 $48,726.00 195.5 $24,923.79 2015 $51,676.00 218.3 $23,672.01

Which of the following expenditures would increase the investment component of U.S. GDP?

You purchase a new house.

A particularly strong expansion is called a(n)

boom

Involuntary part-time workers are

counted as employed.

Fiscal policy refers to

decisions to determine the government's budget.

A factory worker earned $10 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31. From 1980 to 1990, the factory worker's hourly real wage

decreased from $12.20 to $11.45. Real hourly wage decreased from $12.20 (i.e., $10/0.82) to $11.45 (i.e., $15/1.31).

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline _____, and the real price of gasoline _____.

increased; decreased

The annual percentage rate of change in the price level is the

inflation rate.

The value of unpaid work by a homemaker ______ included in GDP and the value of housekeeping services sold in a market ______ included in GDP.

is not; is

Using real GDP to compare the level of economic well-being in two countries may be misleading because the value of ______ contributes to economic well-being but is excluded from real GDP.

leisure

In the 1950s and 1960s the European unemployment rate tended to be ______ the U.S. unemployment rate, while in the 1990s the European unemployment rate tended to be ____ the U.S. unemployment rate.

lower than; higher than

Gross domestic product (GDP) equals the ______ of final ______ produced within a country during a given period of time.

market value; goods and services

The real wage is the wage

measured in terms of purchasing power.

The Federal Reserve makes decisions regarding _____ policy while Congress makes decisions regarding _____ policy.

monetary; fiscal

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ______ inflation as a result of ______ bias.

overstate; substitution

Real GDP measures the ______ of production.

physical volume

"U.S. exports will increase as a result of joined CAFTA," is an example of a ______ statement, while "The U.S. should join CAFTA," is an example of a _____ statement.

positive; normative

Small differences in annual growth rates of real GDP generate large differences in real GDP over time because of the

power of compound interest.