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Macroeconomics is
· the study of economy-wide phenomena
Macroeconomics includes the study of topics such as:
· national output, the national unemployment rate, the rate of inflation, and the trade deficit
Statistics such as GDP, the unemployment rate, the rate of inflation, and the trade balance are
· macroeconomic, since they tell us something about the economy as a whole
Statistics such as individual stock prices, salaries of business executives, and prices of California wines are
· microeconomic, since they reflect situations in individual businesses and markets
Microeconomics is
· the study of how households and firms make decisions, and how they interact in markets
The goal of macroeconomics is
· to explain the economic changes that affect many households, firms, and markets at once
The basic tools of supply and demand are
· as central to macroeconomic analysis as they are to microeconomic analysis
The most closely watched economic statistic is
· GDP
The best single measure of the economic well-being of a society is believed to be
· Gross Domestic Product
Gross Domestic Product measures
· both a and b
For the economy as a whole
· income must equal expenditure
In a simple circular-flow diagram, total income and total expenditure in an economy
· are always equal because every transaction has both a buyer and a seller
If you buy a new snowboard from the local sporting goods store, as a result of your purchase
· the increase in expenditure in the economy will equal the increase in income in the economy
A circular-flow diagram is used to describe
· the flow of income and expenditures in an economy
GDP in an economy consisting only of households and firms can be computed
· either by the method described in a or the method described in b
In the real economy, expenditure and income are always the same
· regardless of whether households spend all of their income or buy all of the goods and services produced in the economy
Which of the following statements best explains the equality between total income and total expenditure in an economy?
· Total income and total expenditure are equal in an economy because every transaction has both a buyer and a seller
Gross Domestic Product is defined as
· the market value of all final goods and services produced within a country in a given period of time
The real economy is more complicated than the one illustrated in a simple circular-flow diagram because
· households do not buy all goods and services produced in the economy, and households do not spend all of their income on goods and services
In order to include many different products in a summary or aggregate measure, GDP
· uses market prices
Which of the following would be the most useful way to measure GDP?
· use the value of the products measured by market price to add together the production of different kinds of goods and services
Market prices are used in adding together different kinds of products into a single, summary measure of economic activity because
· market prices measure what people are willing to pay for different goods; hence, they reflect the value of those goods.
The old adage, “You can’t compare apples and oranges,”
· does not apply to GDP because GDP does add together the values of many different products in order to get a single measure of economic activity
Which of the goods and services produced in the economy are included as part of GDP?
· all final goods and services bought and sold in legal markets plus the imputed value of some other legal goods and services that are not bought and sold in markets
The value of the housing service provided to individuals who live in housing they own themselves is included in GDP by
· estimating the rental value of the housing
An example of a non-market good or service that is included as an estimate in GDP is:
· the estimated rental value of owner occupied homes
Juanita rented a house in 1999, paying $500 each month. She could have continued renting at $500 per month in 2000, but took the option of purchasing the house from the owner. She now makes a $650 per month mortgage payment. The housing service Juanita receives will be
· included in 2000 GDP at the rate of $500 per month
Goods and services produced and sold illegally
· are excluded from GDP
Chris lives in Utah, where gambling is illegal. Chris becomes a professional gambler, going to work each week in Idaho, where gambling is legal. In 2001, he earns $100,000 from his profession. What will be the effect of his earnings on GDP?
· GDP will increase by $100,000 because the income was earned legally
Chris has been a professional gambler in Idaho, where gambling is legal, for several years. He lives in Utah, however, and his wife Christa convinces him to start practicing his profession in Utah, where gambling is illegal. In 2002, Chris earns $100,000 gambling in Utah, and reports the income to the IRS as income from illegal sources. What will be the effect of Chris's earnings on 2002 GDP?
· GDP will be unaffected because the income was earned illegally
Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn 100 times as much as did Babe Ruth in 1931. However, prices have also risen since 1931. We can conclude that
· one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.
The statistic used to convert dollar amounts into meaningful measures of purchasing power is called
· the consumer price index
When the consumer price index rises, the typical family
· has to spend more dollars to maintain the same standard of living
The consumer price index is used to
· monitor changes in the cost of living
The term inflation is used to describe a situation in which
· the overall level of prices in the economy is increasing
When the overall level of prices in the economy is increasing, we say that the economy is experiencing
· inflation
The inflation rate is defined as
· the percentage change in the price level from the previous period
The inflation rate is
· Answers a and b are both correct
The CPI is a measure of
· the overall cost of goods and services bought by a typical consumer
The CPI is calculated by which of the following agencies?
· the Bureau of Labor Statistics
The CPI is calculated
· Monthly
The statistic used to convert dollar amounts into meaningful measures of purchasing power is called
· the consumer price index.
When the consumer price index rises, the typical family
· has to spend more dollars to maintain the same standard of living
The consumer price index is used to
· monitor changes in the cost of living..
The term inflation is used to describe a situation in which
· the overall level of prices in the economy is increasing.
When the overall level of prices in the economy is increasing, we say that the economy is experiencing
· inflation
The inflation rate is defined as
· the percentage change in the price level from the previous period
The CPI is a measure of
· the overall cost of goods and services bought by a typical consumer.
The CPI is calculated by which of the following agencies?
· the Bureau of Labor Statistics
The CPI is calculated
· Monthly
When constructing the CPI, the Bureau of Labor Statistics tries to include
· all goods and services that typical consumers buy.
In the CPI, goods and services are weighted according to
· how much consumers buy of each item
How are the weights on the various goods and services in the CPI basket determined?
· A survey is conducted to determine how much of each good and service typical consumers purchase.
In the CPI, the base year is
· the benchmark against which other years are compared, updated each year.
By far the largest category of goods and services in the CPI basket is
· housing.
Categories of U.S. consumer spending, ranked from largest to smallest are:
· housing, transportation, food and beverages, and medical care.
Which of the following makes up the smallest category of consumer spending in the U.S.?
· Apparel
If the cost of housing increases by 20 percent, the CPI is likely to increase by
· about 8 percent.
If the CPI increases from one year to the next, the economy has experienced
· inflation.
The inflation rate is calculated by
· determining the percentage increase in the price index from the preceding period
If the consumer price index was 100 in the base year and 105 the following year, the inflation rate was
· 5 percent.
The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?
· 10 percent between the first and second year, 11 percent between the second and third year
Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?
· All changes show the same rate of inflation.
Which change in the price index shows the greatest rate of deflation?
· 150 to 120
About how many goods and services are included in the basket which forms the basis for the consumer price index?
· Thousands
The producer price index measures
· the cost of a basket of goods and services bought by firms.
Changes in the producer price index are often thought to be useful in predicting
· changes in the consumer price index.
The goal of the consumer price index is
· to measure changes in the cost of living.
Which of the following is not a widely-acknowledged problem with the CPI as a measure of the cost of living?
· unmeasured price change
When prices change from year to year,
· they do not all change proportionately.
Which of the problems in the construction of the CPI is best represented by the invention of pocket-sized computers?
· introduction of new goods
A nation’s standard of living is measured by its
· nominal GDP per person.
Over the past century in the United States, real GDP per person has grown by about
· 2 percent per year.
Over the past century in the United States, average income as measured by real GDP per person has grown at an average annual rate that implies should double about every
· 35 years.
In the United States, as measured by real GDP, average income is about how many times as high as average income a century ago?
· 8
In recent decades, average income in some East Asian countries, such as Hong Kong, Singapore, and Taiwan, has risen about
· 7 percent per year.
In some East Asian countries, average income, as measured by real GDP per person, has grown at an average annual rate that implies output should double about every
· 10 years.
In the length of one generation, which of the following countries has gone from being among the poorest countries in the world to being among the richest?
· South Korea
Average income has been stagnant for many years in
· Ethiopia.
Which of the following is NOT true?
· Productivity is not closely linked to government policies
Which of the following is measured by real GDP?
· total real output
Which of the following is correct?
· Both levels and growth rates of real GDP per person are diverse across countries.
In 1997, the typical citizen of China had about as much real income as the typical American in
· 1870.
Of the following countries, which had the highest growth rate over the last 100 years?
· Brazil
Countries that grew the fastest over the last 100 years had growth rates of about
· 3.0 percent.
Compounding refers to
· the accumulation of a growth rate over a period of time.
According to the “rule of 70,” about how many more years does it take the output of a country to double if its output grows at 2 percent per year instead of 3 percent per year?
· 12 years
According to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately
· 70/x years.
Productivity
· explains most of the differences across countries in the standard of living
Which of the following is a correct way to measure productivity?
· divide output by the number of hours worked
Which of the following is not correct?
· Countries that have had higher output growth per person have typically not experienced higher productivity growth.
Which of the following is a determinant of productivity?
· All of the above are correct.
Natural resources
· All of the above are correct.
Which of the following is an example of a nonrenewable resource?
· Oil
In a market economy, scarcity of resources is reflected in
· market prices.
In a market economy, the real, or inflation adjusted, price of a resource measures its
· relative scarcity.
The market prices of most natural resources (adjusted for inflation) have been
· stable or falling
The relationship between the quantity of output created and the quantity of inputs needed to create it is called
· the production function.
Capital accumulation
· requires that society sacrifice consumption goods in the present
Across countries, investment and growth rates are
· positively related
The traditional view of the production process is that capital is subject to
· diminishing returns
If there are diminishing returns to capital
· increases in the capital stock increase output by ever smaller amounts
When opening a construction company, you might need to buy trucks, tools, and a storage shed. Economists call these expenditures
· capital investment
When a country saves a larger portion of its GDP, it will have
· more investment, and so have more capital and higher productivity
Savers
· supply money to the financial system; borrowers demand money from the financial system
The bond market, the stock market, banks, and mutual funds are all part of the U.S
· financial system
Financial markets are
· the financial institutions through which savers can directly provide funds to borrowers
The two most important financial markets in our economy are the
· bond market and stock market.
Which of the following is correct?
· A bond buyer can sell the bond before it matures
The length of time until a bond matures is called the
· term.
Long-term bonds are generally
· more risky than short-term bonds and so pay higher interest
On which bond is default most likely?
· a junk bond
Municipal bonds pay a
· low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax
The sale of stocks
· to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance
Stock represents
· All of the above are correct
Compared to bonds, stocks offer the holder
· All of the above are correct
The single most important piece of information about a stock is the
· price.
Profits not paid out to stockholders are
· retained earnings.
Financial intermediaries are
· financial institutions through which savers can indirectly provide funds to borrowers
Which of the following is a financial intermediary?
· a mutual fund
The identity that shows that GDP is both total income and total expenditure is represented by
· Y = C + I + G + NX
A closed economy does not
· trade with other economies
The source of the supply of loanable funds
· is saving and the source of demand for loanable funds is investment
The supply of loanable funds
· slopes upward because an increase in the interest rate induces people to save more
If the government currently has a budget deficit
· All of the above are correct
An increase in the budget deficit
· changes the supply of loanable funds
An increase in the budget deficit
· drives investment spending down
The fall in investment due to government borrowing is called
· crowding out
The ratio of debt to GDP tended to fall
· during the late 1990s
Which of the following is incorrect?
· The ratio of debt to GDP in the U.S. has always been less than one
Which of the following beliefs would make someone less likely to oppose government deficits?
· The demand for loanable funds curve is very steep.
The natural rate of unemployment is
· the amount of unemployment that the economy normally experiences
Cyclical unemployment refers to
· year-to-year fluctuations of unemployment around its natural rate
Cyclical unemployment is closely associated with
· short-run ups and downs of the economy.
The BLS produces data on
· All of the above are correct
Which list includes all the categories into which the BLS divides the adult population?
· employed, unemployed, or not in the labor force
Which of the following would be counted as unemployed according to official statistics?
· Mary, who is waiting for her new job to start
Who would be included in the labor force?
· Dave, who does not have a job, but is looking for work
To be counted as unemployed, a person must
All of the above are correct
A college student who is not working or looking for a job is counted as
· neither employed nor part of the labor force
The BLS defines the unemployment rate as
· the percentage of the labor force that is unemployed
Which of the following equations is correct?
· Unemployment Rate = (number of unemployed ё labor force) x 100.
Which of the following is correct for people ages 20 and over?
· Women have lower rates of labor-force participation and higher rates of unemployment compared to those of men
The labor-force participation rate of the U.S. adult population (ages 16 and over) is about
· 65 percent
In the United States in recent years, the unemployment rate among teenagers has been
· more than three times that of people ages 20 and over
A rough estimate of the natural rate of unemployment is
· 5.5 percent
Since World War II, the labor-force participation rate
· has increased for both men and women
If an unemployed person quits looking for work, ceteris paribus
· Both a and c are correct.
Discouraged workers
· are counted as part of the adult population, but not as part of the labor force
The reported unemployment rate should be viewed as
· a useful but imperfect measure of joblessness
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