question

If increasing returns to scale exist, then an increase in all inputs of 5 percent should: A. not affect output B. should increase output by less than 5 percent. C. should increase output by 5 percent. D. should increase output by more than 5 percent.

answer

D. should increase output by more than 5 percent. When increasing returns to scale exist, an identical proportional increase in all inputs produces a greater than proportional increase in output, thus increasing output here by more than 5 percent.

question

Because official price indexes do not account for some improvements in product quality, official estimates of real GDP tend to underestimate the true increase in real output. True False

answer

True. Because official price indexes do not account for some improvements in product quality, the price indexes overestimate inflation and thus underestimate the true increase in real output.

question

The Rule of 72 implies that a country with a growth rate of 4 percent will double its income in: A. 6 years. B. 8 years. C. 12 years. D. 18 years.

answer

D. 18 years. The Rule of 72 says that a country's income will double in the number of years equal to 72 divided by the country's growth rate, or 18 years in this case.

question

If the economy were producing at its potential output, then the unemployment rate and capacity utilization rate would most likely be at their target rates. True False

answer

True. Potential output is the output that would materialize at the target rate of unemployment and capacity utilization. If output is at potential, unemployment would very likely be at the target rate.

question

All of the following problems are the central concern of macroeconomics except: A. Product pricing. B. growth. C. unemployment. D. business cycles.

answer

A. Product pricing. The four central macroeconomic problems are growth, business cycles, unemployment and inflation.

question

If the CPI increased from 87 to 95, the rate of inflation during that period is: A. 5% B. 6.5% C. 8.5% D. 9.2%

answer

D. 9.2% A rise in the price level is calculated as the change in the price index during that time period (one month to the next or one year to the next). Therefore, [(95-87/87] X 100 = 9.2%

question

The crucial factor in the Classical Growth Model is the: A. quantity of land. B. quantity of capital. C. quantity of labor. D. quantity of entrepreneurs.

answer

B. quantity of capital. Capital accumulation is the key factor in the Classical Growth Model.

question

Human capital refers to people's knowledge gained primarily through experience, education, and on-the-job training. True False

answer

True. Please see the discussion regarding human capital in the text and lecture.

question

Incentives for growth in an economy are generally greater when resources are privately owned. True False

answer

True. When individuals get much of the gains of growth themselves (i.e. own the productive resources), they have the incentives to work harder which ultimately leads to growth.

question

The U.S. Department of Commerce defines an economic expansion as: A. an increase in real economic output recorded for two consecutive quarters in a year. B. a period during which the official unemployment rate exceeds the natural rate of unemployment for one year. C. any two consecutive quarters in which the actual unemployment rate is below the natural rate of unemployment. D. any increase in nominal GDP reported in a single quarter.

answer

A. an increase in real economic output recorded for two consecutive quarters in a year.

question

Inflation is a one-time rise in the general price level. True False

answer

False. Inflation is a continual or sustained rise in the general price level.

question

Structural unemployment occurs when: A. there is a general downturn in the economy due to lower aggregate demand for goods and services. B. people quit a job just long enough to look for and find another one. C. people over 65 years old decide not to work. D. people lose a job when their skills become obsolete due to technological innovations.

answer

D. people lose a job when their skills become obsolete due to technological innovations. Structural unemployment is unemployment caused by economic restructuring making some skills obsolete.

question

All the following are generally incompatible (not associated) with full employment except: A. Cyclical unemployment. B. Structural unemployment. C. Frictional unemployment. D. Tabulated unemployment.

answer

C. Frictional unemployment. Full employment is an economic climate in which just about everyone who wants a job could have one. Frictional unemployment is viewed as a necessity in a dynamic economy and consistent with full employment. Structural and (or) cyclical unemployment would typically keep the economy below full employment, and Tabulated unemployment is a term that doesn't exist.

question

If the CPI in year 1 equals 100 and the CPI in year 2 equals 104, it can be concluded that: A. the rate of inflation from year 1 to year 2 is 4%. B. the rate of inflation from year 1 to year 2 is 104%. C. there was no inflation from year 1 to year 2. D. year 2 is the base year.

answer

A. the rate of inflation from year 1 to year 2 is 4%. A rise in the price level is calculated as the change in the price index divided by the price index in the previous year multiplied by 100. Therefore, [(104-100)/100]=4%

question

Policies that affect the supply of output in the economy as a whole are: A. most relevant to the short run business cycle framework. B. most relevant to the long run growth framework. C. relevant to neither the short run business cycle nor long run growth frameworks. D. completely and utterly impossible to say, since the short run and long run are one and the same.

answer

B. most relevant to the long run growth framework. Policies that affect the supply of output are most relevant in the long run growth framework because factors affecting supply dominate factors affecting demand in the long run.

question

The target rate of unemployment is defined as the absolute lowest possible rate of unemployment that can be achieved in any economy. True False

answer

False. The target rate of unemployment is defined as the lowest rate of unemployment that can be achieved without creating accelerating inflation, NOT the absolute lowest possible rate of unemployment.

question

The lowest sustainable rate of unemployment possible under existing conditions that will not lead to accelerating inflation is called the: A. minimum rate of unemployment. B. target rate of unemployment. C. maximum rate of unemployment. D. crazy rate of unemployment.

answer

B. target rate of unemployment.

question

Classicals would most likely agree that: A. nearly all unemployment is generally frictional unemployment. B. frictional unemployment is only a small part of the total unemployment. C. structural and cyclical unemployment are more common than frictional unemployment. D. society owes a person a job commensurate with his or her training.

answer

A. nearly all unemployment is generally frictional unemployment. Classicals tend to see unemployment as an individual choice and thus most unemployment is frictional.

question

Housing comprises roughly 40% of the market basket in the CPI. If the price of housing rises 15% in one year while the other components in the CPI rise by 10%, the CPI will rise by 12%. True False

answer

True. Multiply the share times the percent increase to determine that component's contribution to the overall change in the CPI (.4 X .15 = .06) + (.6 X .10 = .06) = .06 + .06 = .12 or 12%

question

Keynesians would most likely agree that: A. all unemployment is generally frictional unemployment. B. if a person isn't working, that is his or her own choice. C. cyclical unemployment can be dealt with through government activist policies. D. unemployment is impossible, especially since Supply creates its own Demand.

answer

C. cyclical unemployment can be dealt with through government activist policies. Keynesians see a much more active role for government in reducing unemployment (especially cyclical unemployment).

question

If the potential labor force is 160 million, and the number of people working is 152 million, the unemployment rate is: A. 8 million. B. 5 percent. C. 5 million. D. 8 percent.

answer

B. 5 percent. To calculate the unemployment rate, divide the number of people who are unemployed (160-152=8) by the potential labor force (160) and multiply that value by 100. This equals 8/160 X 100 = 5%. 8 million is the number of unemployed workers, not the unemployment rate.

question

If the CPI in 1979 was 72.6 and it was 82.4 in 1980, then the inflation rate from 1979 to 1980 was: A. 9.8% B. 10.2% C. 11.9% D. 13.5%

answer

D. 13.5% A rise in the prices is calculated as the change in the price index divided by the price index in the previous year multiplied by 100 [(82.4-72.6)/72.6] X 100 = 13.5%

question

Inflation redistributes income from the people who raise their prices or wages to people who cannot or do not raise their prices or wages. True False

answer

False. Inflation tends to redistribute income from the people who do not or cannot raise their wages or prices to people who can and do raise their prices.

question

If nominal output is $4.2 trillion and the GDP Deflator is 5 percent higher than its base year, then real output is: A. $3.84 Trillion. B. $4 Trillion. C. $4.4 Trillion. D. $4.84 Trillion.

answer

B. $4 Trillion. Real output is calculated as the ratio of nominal output to the price index then times 100. Therefore, [4.2/105] X 100 = 4

question

If the rate of inflation in consumer prices is less than the rate of increase in a person's nominal income, that person's: A. market basket will expand. B. purchasing power increases. C. purchasing power decreases. D. real income declines.

answer

B. purchasing power increases. To find the change in a \"real\" number, subtract the percent change in the price level from the percent change in the nominal concept. Since nominal income has risen by more than the rise in the CPI, purchasing power or real income has increased.

question

The economy sometimes grows at a rate faster than the long-term secular growth average rate, and other times grows at a rate slower than the long-term secular growth average rate. These fluctuations are called: A. spending cycles. B. investment cycles. C. business cycles. D. unemployment cycles.

answer

C. business cycles.

question

By definition, aggregate income is equal to aggregate production (output). True False

answer

True. By definition, aggregate income is equal to aggregate production (output). See the text and lectures for further details.

question

Gross Domestic Product measures: A. national income after taxes. B. the total value of all personal consumption expenditures. C. the market value of all final goods and services produced in a country in a given year. D. employment.

answer

C. the market value of all final goods and services produced in a country in a given year.

question

When output is below its potential, what would most likely be happening in the economy? A. The unemployment rate is equal to its target rate and the capacity utilization rate is above its target rate. B. The unemployment rate is below its target rate and the capacity utilization rate is equal to its target rate. C. The unemployment rate is above its target rate and the capacity utilization rate is equal to its target rate. D. The unemployment and capacity utilization rates are equal to their target rates. Answer Key: C

answer

C. The unemployment rate is above its target rate and the capacity utilization rate is equal to its target rate. Potential output is the level of output that would materialize at the target rate of unemployment and capacity utilization. When we are above the target rate of unemployment, there are more people unemployed than the target rate, so that means lower output and income, and thus a level of output below the economy's potential level of output. A level of unemployment below the target rate of unemployment means more people are employed than what would normally occur at the target rate, which would lead to higher levels of output and income, and usually a level of output above potential output, given that the capacity utilization rate is at its target rate.

question

Nominal GDP measures: A. the dollar market value of intermediate products produced during the year. B. the sum of the dollar market value of both final and intermediate products produced during the year. C. the sum of the dollar market value of final products produced and imported during the year. D. the market value of final goods and services produced in an economy during the year measured at current market prices.

answer

D. the market value of final goods and services produced in an economy during the year measured at current market prices.

question

The Industrial Revolution ended unemployment as a problem for society due to the shift to wage labor and division of responsibilities which occurred at that time. True False

answer

False. The Industrial Revolution led to unemployment as a social problem due in large part to the division of labor and specialization, as people moved from farms and an agrarian economy to the cities where people became employees and wage earners, ever more susceptible to layoffs and unemployment than ever before.

question

Which of the following is an example of a final good or service? A. A iPod purchased by a impoverished Economics instructor so he can listen to his favorite song, \"How Broke I Am\". B. Vegetables purchased by a local restaurant to make soup. C. Iron ore purchased by U.S. Steel Corp. to make steel for Ford. D. the lumber produced by Boise Cascade and sold to a builder of new homes.

answer

A. A iPod purchased by a impoverished Economics instructor so he can listen to his favorite song, \"How Broke I Am\". GDP includes only goods and services that are meant for final demand. Sales to other firms are intermediate goods, and are used to produce other goods are not counted in GDP.

question

According to the Classical view of business cycles: A. fluctuations in business activity always occur in regular and predictable patterns. B. fluctuations in business activity are to be expected and should be accepted just like changes in the seasons of a year are accepted. C. expansions and contractions of the business cycle are symptoms of underlying problems in the economy and should be dealt with. D. the appropriate macroeconomic policy can easily eliminate all fluctuations in business activity.

answer

B. fluctuations in business activity are to be expected and should be accepted just like changes in the seasons of a year are accepted. Classicals generally favor laissez-faire or non-activist policies. In other words, fluctuations in business activity should be accepted just like seasons in the year are accepted. We can't do anything to alter or change them. And if we did, we would just make matters worse. The other responses are definitely Keynesian beliefs.

question

If a used car dealer buys a car for $5000 and resells it for $5500, what amount will be added to GDP? A. Nothing. B. $500 C. $1000 D. $5500

answer

B. $500 Subtract the cost of production ($5000) from final sales ($5500) to find the contribution of the services by the used car dealer to GDP ($500).

question

Use the following information to answer the question: There are three firms in an economy: X, Y, and Z. Firm X buys $300 worth of goods from firm Y and buys $200 worth of goods from firm Z, and produces 250 units of output at $10 per unit. Firm Y buys $150 worth of goods from firm X, and $250 worth of goods from firm Z, and produces 300 units of output at $5 per unit. Firm Z buys $75 worth of goods from firm X, and $50 worth of goods from firm Y, and produces 100 units of output at $7 per unit. Given this information, what is the GDP for our three firm economy? A. $3675 B. $2450 C. $4400 D. $3950

answer

A. $3675 GDP is the sum of the value added by the three firms = $2000 + $1100 + $575 = $3675

question

Which of the following items would not be included in GDP for the current year? A. The dollar value of a lawyer's services rendered in the current year. B. The dollar value of a do-it-yourself repair job in the current year. C. The production of 50,000 books by McGraw-Hill in one year that were not sold in the current year. D. The production and purchase of 50 new trucks by UPS in the current year in order to help deliver more parcels to customers.

answer

B. The dollar value of a do-it-yourself repair job in the current year. Only production/consumption of final goods and services enters into GDP. Nonmarket activities, such as a do-it-yourself repair jobs, are activities not counted as part of GDP.

question

If the general price level rose by 5% and real output fell by 10%, nominal output: A. fell by about 5%. B. fell by about 10%. C. rose by about 5%. D. rose by about 10%.

answer

A. fell by about 5%. The percentage change in nominal output equals the sum of the percentage change in real output and the percentage change in the price level. So, if real output (output adjusted for inflation) fell by 10% while the price level rose by 5%, that means that nominal output (output measured at current prices) must have fallen by approximately 5%.

question

Which of the following is not part of National Income? A. Employee compensation. B. Interest. C. Rent. D. All are components of National Income

answer

D. All are components of National Income Employee compensation, interest, rent and profits are included in National Income.

question

GDP is: A. C + I + G B. C + I + G + X + M C. C + I + G - (X - M) D. C + I + G + (X - M)

answer

D. C + I + G + (X - M)

question

Economic growth completely depends on people consuming their income rather than saving and investing. True False

answer

False. Saving and investing helps create machines that in the future can be used to produce more output, and thus help the economy grow.

question

Say real GDP is $9.2 trillion. If personal consumption is $5.1 trillion, investment is 1.8 trillion, and government purchases are 2.5 trillion, then: A. personal consumption is less than exports. B. exports exceed imports by $0.2 trillion. C. imports are equal to exports. D. imports exceed exports by $0.2 trillion.

answer

D. imports exceed exports by $0.2 trillion. GDP = Consumption + Investment + Government purchases + (Exports - Imports). Rewritten, Net Exports = GDP - Consumption - Investment - Government purchases = 9.2 - 5.1 - 1.8 - 2.5 = - 0.2

question

A doubling of both nominal GDP and prices for all goods and services in the economy implies that: A. real GDP doubled. B. real GDP more than doubled. C. real GDP less than doubled. D. real GDP remained unchanged

answer

D. real GDP remained unchanged Real GDP did not change. The % change in real output = % change in nominal output - % change in prices. Therefore, real GDP remained unchanged.

question

A Consumer Price Index for 1998 of 124 (1982-84 = 100) means that the cost of a given bundle of goods and services: A. decreased by 124 percent from 1982-84 to 1998. B. decreased by 24 percent from 1982-84 to 1998. C. increased by 24 percent from 1982-84 to 1998. D. increased by 124 percent from 1982-84 to 1998.

answer

A rise in the price level (measured by calculating the CPI) is calculated as the change in the price index divided by the price index in the previous year (or base year) multiplied then by 100. Therefore, [(124-100)/100] X 100 = 24%.

question

Given nominal GDP of $4.2 trillion and a GDP Deflator is 120, we can conclude that real GDP is equal to: A. $3 Trillion. B. $3.5 Trillion. C. $3.9 Trillion. D. $5.2 Trillion.

answer

B. $3.5 Trillion. Real GDP is the ratio of nominal GDP to the price index times 100: 4.2/120 X 100 = 3.5

question

Because patents provide strong incentives to develop new technologies, they tend to help to increase economic growth. True False

answer

True. Many other factors, such as the level of physical and human capital, the rate of population growth, and the nature of institutions also have powerful effects on growth. But indeed patents and patent laws that protect them do provide strong incentives to develop new technologies because of the potential profits that could be earned from those patented technologies.

question

Let's say that on 12/31/05, real GDP was $4 trillion. A year later on 12/31/06, nominal GDP was $5.445 trillion. If GDP increased from $4 trillion (real) to $5.445 trillion (nominal) while the price level increased 10% from 2005 to 2006, then the percentage change in the real GDP from 2005 to 2006 is: A. 10.1% B. 12.5% C. 19.2% D. 23.75%

answer

D. 23.75% The 10% price increase implies that the price index is 110. Real GDP is therefore 5.445/110 X 100 = $4.95 trillion. The percentage increase from $4 trillion to $4.95 trillion is = 4.95-4/4 = 23.75%

question

According to the Keynesian view of business cycles: A. fluctuations in business activity occur in regular and predictable patterns. B. fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted. C. expansions and contractions in the business cycle are symptoms of underlying problems and should be dealt with. D. the appropriate macroeconomic policy can easily eliminate all fluctuations in business activity.

answer

C. expansions and contractions in the business cycle are symptoms of underlying problems and should be dealt with. Keynesians generally favor activist government policies, and fluctuations in the business cycle are symptoms of underlying problems that can and should be dealt with by government. But remember, not all fluctuations can be easily dealt with, or even correct the problem.

question

One reason market economies have been so successful in promoting growth is that: A. monopolies have grown. B. people are selfless. C. government is good at directing production. D. people are typically selfish.

answer

D. people are typically selfish. A market economy is coordinated by the invisible hand directed ultimately by people's selfishness. Individuals who can put their vision into actions reap the benefits of those actions in a market economy. This has provided a source of growth for market economies.

question

The size of underground economies differs among countries. In Greece it has been estimated to be as big as 30% of GDP; in Spain 25%; in Italy 20%; and in the United States about 7% of GDP. Given this information, official GDP measures understates true economic activity the least for which country? A. Greece. B. Spain. C. The United States. D. Italy.

answer

C. The United States. Since the U.S. has reportedly the smallest relative underground economy, official statistics underestimates production the least for the U.S.

question

Policies that affect the demand for output in the economy as a whole are: A. most relevant to the short run business cycle framework. B. most relevant to the long run growth framework. C. relevant to neither the short run business cycle or the long run growth framework. D. completely and utterly impossible to say, since short run and long run is one and the same.

answer

A. most relevant to the short run business cycle framework. Policies that affect the demand for output and are most relevant to the short run business cycle framework because factors affecting demand dominate factors affecting supply in the short run.

question

Historically, as unemployment declines, inflation: A. tends to rise. B. tends to fall. C. tends to not change at all, ever. D. is completely impossible to calculate.

answer

A. tends to rise. A reduction of unemployment results when economic output increases. Above potential, an increase in output tends to lead to inflation.

question

Which of the following would not be included in the personal consumption expenditure category, \"C\"? A. Your college tuition. B. Medical expenses. C. A machine purchased by Intel Corporation to make its latest microprocessor. D. A movie theater ticket.

answer

C. A machine purchased by Intel Corporation to make its latest microprocessor. Personal consumption expenditures consist of household and individual purchases of services and durable and non durable goods. A machine purchased by Intel represents business investment \"I\", not personal consumption \"C\".

question

Increasing returns to scale exist when doubling all inputs less than doubles output. True False

answer

False. Decreasing, not increasing, returns to scale occur when output rises proportionally less than the increase in all inputs.

question

The investment component of GDP represents: A. purchases made by foreign governments of military equipment produced in the U.S. by Lockheed. B. purchases made by foreign consumers of Ford Explorers produced in the U.S. C. purchases of final goods and services, which are produced in the U.S., by the U.S. Government. D. purchases of final goods and services, which are produced in the U.S., by U.S. businesses.

answer

D. purchases of final goods and services, which are produced in the U.S., by U.S. businesses.

question

Officially, inflation occurs when there is: A. a one-time increase in the overall price level. B. a one-time increase in one price for one good. C. a sustained increase in the general price level. D. a sustained increase in wages.

answer

C. a sustained increase in the general price level.

question

Compounding implies that a country's standard of living will be higher the _______________ is its initial income level and the __________________ is its annual growth rate. A. lower; lower B. higher; higher C. lower; higher D. higher; lower

answer

B. higher; higher Compounding implies that next year's income is a function of last year's income and the change in income between last year and this year. Therefore, the correct answer is \"higher; higher.\"

question

Since 1945: A. the average length of economic expansions has increased and the average length of economic contractions has decreased. B. the average length of both economic expansions and economic contractions has increased. C. the average length of economic expansions has decreased and the average length of economic contractions has increased. D. the average length of both economic expansions and economic contractions has decreased.

answer

A. the average length of economic expansions has increased and the average length of economic contractions has decreased. Since 1945, the average length of economic expansions has increased and the average length of contractions has decreased. Although the interpretation of the statistics is controversial, most economists believe that the business cycle has been less severe as a result of government intervention and activism.

question

____________________ allows growth theorists to ignore aggregate demand and focus only on aggregate supply. A. The Iron Law of Income B. Diminishing marginal productivity C. Say's Law D. The Classical growth model

answer

C. Say's Law Say's Law states that supply creates its own demand. This law implies that whatever is produced will be consumed, making it possible for growth theorists to ignore aggregate demand and focus only on aggregate supply.

question

The Rule of 72 implies that a country will double its income in 24 years if its growth rate is: A. 1 percent. B. 2 percent. C. 3 percent. D. 4 percent.

answer

C. 3 percent.

question

By definition, Nominal GDP represents Real GDP adjusted for inflation. True False

answer

False. Real GDP represents nominal GDP adjusted for inflation. The statement is reversed, and as such, is false. Nominal GDP is final output of all goods and services measured at current market prices. There is no adjustment made for inflation with Nominal GDP

question

The growth produced by markets: A. does not affect the distribution of income. B. increases the level of per capita income and creates a more equitable distribution of income as well usually. C. does not affect the level of per capita income. D. increases the level of per capita income but may make the distribution of income less equitable.

answer

D. increases the level of per capita income but may make the distribution of income less equitable. The growth produced by markets tends to benefit both the rich and the poor, but not necessarily equally.

question

If the CPI increased by 16 percent to 92.8, then the initial value of the CPI was: A. 98 B. 90 C. 84 D. 80

answer

D. 80 The percentage change from 80 to 92.8 is 16 percent. To see how, solve [(92.8 - X)/X] = .16

question

In 1998, India's population was about 1 billion people and its GDP was roughly $400 billion, making its per capita output about: A. $250 B. $400 C. $800 D. $2500

answer

B. $400 Per capita output is obtained by dividing GDP by the population, which in this question is $400 billion / 1 billion = $400.

question

Institutions that tend to foster growth: A. have incentives built into them that lead people to work hard and be increasingly more efficient. B. encourage people to pursue activities that inhibit growth in others. C. allow people to gain income for themselves by creating impediments for others. D. encourage people to spend most of their time in leisure pursuits.

answer

A. have incentives built into them that lead people to work hard and be increasingly more efficient. Growth compatible institutions foster growth by encouraging people to work hard and be efficient.

question

Computer-driven factories using robots to build automobiles has resulted in workers being laid off. What type of unemployment best describes the workers' situation? A. Cyclical unemployment. B. Tabulated unemployment. C. Structural unemployment. D. Frictional unemployment.

answer

C. Structural unemployment. Structural unemployment is unemployment caused by economic restructuring making some skills obsolete, such as automation making some auto factory workers' skills obsolete for example

Macroeconomics Foothill College Exam Ch: 6-8

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