EC 111 Exam 2

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El-Karasky

For an economy as a whole, income must equal expenditure because

every dollar of spending by some buyer is a dollar of income for some seller.

The consumption component of GDP includes spending on

durable goods, nondurable goods, and services.

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,

U.S. investment and GDP increase, but German GDP is unaffected.

Goods that go into inventory and are not sold during the current period are

included in current period GDP as inventory investment.

The inflation rate is the

percentage change in the price level from one period to another.

If nominal GDP is $10 trillion and real GDP is $8 trillion, then the GDP deflator is

125, and this indicates that the price level has increased by 25 percent since the base year

Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that

GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.

GDP does not reflect

the value of leisure.
the value of goods and services produced at home.
the quality of the environment.
(ALL THE ABOVE)

Suppose that over the last twenty-five years a country's nominal GDP grew to three times its former size. In the meantime, population grew by 40 percent and prices rose by 100 percent. What happened to real GDP per person?

It increased, but it less than doubled.

The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers

Is a correct statement dealing with CPI and GPD

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows

Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.

the calculation of the CPI, coffee is given greater weight than tea if

consumers buy more coffee than tea.

Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as the base year. In 2002, the basket's cost was $75.00; in 2004, the basket's cost was $79.50; and in 2006, the basket's cost was $85.86. The value of the CPI was

100 in 2002.
106 in 2004.
114.48 in 2006.
(ALL OF THE ABOVE)

By not taking into account the possibility of consumer substitution, the CPI

overstates the cost of living.

When the quality of a good improves while its price remains the same, the purchasing power of the dollar

increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.

An important difference between the GDP deflator and the consumer price index is that

the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers

If the price of Italian shoes imported into the United States increases, then

the consumer price index will increase, but the GDP deflator will not increase.

Which of the following statements about real and nominal interest rates is correct?

When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate.

Which of the following statements is correct regarding GDP?

The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a good gauge of economic progress.

Which of the following does the level of real GDP measure?

total real income.

Which of the following items plays a role in determining productivity?

physical capital
natural resources
technological knowledge
(ALL OF THER ABOVE)

Which of the following lists contains, in this order, natural resources, human capital, and physical capital?

For a restaurant: the land the restaurant was built on, the things the Chef learned at Cooking School, the freezers where the chops and steaks are kept.

Given that a country's real output has increased, in which of the following cases can we be sure that its productivity also has increased?

The total number of hours worked stayed the same.
The total number of hours worked fell.
(BOTH B and C are correct)

If there are constant returns to scale, the production function can be written as

Y/L = A F( 1, K/L, H/L, N/L).

Refer to Figure 12-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?

In the long run, a higher saving rate leads to a higher level of productivity.
In the long run, a higher saving rate leads to a higher level of income.
In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth rate of income.
(ALL OF THE ABOVE)

Refer to Figure 12-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? One right.

Returns to capital become increasingly smaller as the amount of capital per worker increases.

In countries that experience political instability, standards of living tend to be low because of

lack of respect for property rights.

In the long run, a higher saving rate

increases the level of productivity.

Other things equal, relatively poor countries tend to grow

faster than relatively rich countries; this is called the catch-up effect.

Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the following could explain the failure of a poor county to catch up?

The poor country has poorly developed property rights.

Two of the economy's most important financial intermediaries are

banks and mutual funds.

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative.

Which of the following statements is correct regarding Public Saving?

For a closed economy, the sum of private saving and public saving must equal investment.

If there is surplus of loanable funds, then

neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

If a reform of the tax laws encourages greater saving, the result would be

lower interest rates and greater investment.

Which of the following statements about GDP is correct?

GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.
Money continuously flows from households to firms and then back to households, and GDP measures this flow of money.
GDP is generally regarded as the best single measure of a society's economic well-being.

(ALL THE ABOVE)

The value of the housing services provided by the economy's owner-occupied houses is

included in GDP, and the estimated rental values of the houses are used to place a value on these housing services.

A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be treated in the GDP statistics?

The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-quarter GDP.

Transfer payments are

not included in GDP because they are not payments for currently produced goods or services.

If total spending rises from one year to the next, then

either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both.

Which of the following statements about nominal GDP is correct?

Nominal GDP values production at current prices, whereas real GDP values production at constant prices.

In the economy of Wrexington in 2008, real GDP was $5 trillion and the GDP deflator was 200. What was Wrexington's nominal GDP in 2008?

$10 trillion

GDP is not a perfect measure of well-being; for example,

GDP fails to account for the quality of the environment.

One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called

substitution bias

Suppose the price of gasoline increases rapidly and consumers respond by buying a smaller quantity of gasoline. The consumer price index

overstates this price increase due to the substitution bias.

In the calculation of the CPI, sweaters are given greater weight than jeans if

consumers buy more sweaters than jeans.

The GDP Deflator reflects

the prices of all final goods and services currently produced domestically, while the CPI reflects the price of a fixed basket of goods and services purchased by a typical consumer.

If the price of Spanish olives imported into the United States decreases, then

the consumer price index will decrease, but the GDP deflator will not decrease.

If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is

4 percent.

Which of the following is a determinant of productivity?

human capital per worker
physical capital per worker
natural resources per worker
(ALL OF THE ABOVE)

Which of the following would not be considered physical capital?

It follows that real GDP per person grew faster in Oceania than in Freedonia.

In a particular production process, if the quantities of all inputs used are increased by 60 percent, then the quantity of output increases by 60 percent as well. This means that

the relevant production function has the constant-returns-to-scale property.

If there are diminishing returns to capital, then

increases in the capital stock increase output by ever smaller amounts.

In the long run, an increase in the saving rate

raises the levels of both productivity and income.

Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that

the country that started with less capital per worker will grow faster.

The traditional view of the production process is that capital is subject to

diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries.

The catch-up effect refers to the idea that

it is easier for a country to grow fast and so catch-up if it starts out relatively poor.

The president of Improvia, a developing country, proposes that his country needs to help domestic firms by imposing trade restrictions.

These are inward-oriented policies and most economists believe they would have adverse effects on growth in Improvia.

A country with a relatively low level of real GDP per person is considering adopting two policies to promote economic growth. The first is to increase barriers to trade. The second is to restrict foreign portfolio investment. Which of these policies would most economist think would promote growth?

neither the first nor the second`

The Economic Development Minister of a country has a list of things she thinks may explain her country's low growth of real GDP per person relative to other countries. She asks you to pick the one you think most likely explains her country's low growth. Which of the following contributes to low growth?

poorly enforced property rights

The source of the supply of loanable funds

is saving and the source of demand for loanable funds is investment.

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,

there is a surplus and the interest rate is above the equilibrium level.

If national saving in a closed economy is greater than zero, which of the following must be true?

Either public saving or private saving must be greater than zero.
Investment is positive.
Y - C - G > 0
(ALL OF THE ABOVE)

In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy?

The government's tax revenue is equal to its expenditures.

According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would

lower private saving and raise public saving.

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

would be lower and the equilibrium quantity of loanable funds would be higher

In the loanable funds model, an increase in an investment tax credit would create a

shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.

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