Economics Unit 2 Study Guide

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A nation's gross domestic product (GDP):

is the dollar value of all final output produced within the borders of the nation

Which of the following is an intermediate good?

the purchase of baseball uniforms by a professional baseball team.

Value added refers to:

the difference between the value of a firm's output and the value of the inputs it has purchased from others.

The concept of net domestic investment refers to:

total investment less the amount of investment goods used up in producing the year's output.

Economy A: gross investment equals depreciation
Economy B: depreciation exceeds gross investment
Economy C: gross investment exceeds depreciation

Other things equal, the above information suggests that the production capacity in economy:

C is growing more rapidly than economy B.

If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital stock:

increased by $65 billion.

In national income accounting, government purchases include:

purchases by Federal, state, and local governments.

Answer the question on the basis of the following data. All figures are in billions of dollars.
Gross Private Domestic Investment- 46
Exports of the US- 9
Disposable Income- 190
Personal Saving- 10
Government purchases- 84
Net foreign factor income- 10
consumption of fixed capital- 52
dividends- 13
imports of the us- 12
taxes on production/imports- 22
personal taxes- 38
SS contributions- 23
statistics discrepancy- 0
Refer to the above data. The gross domestic product is:

$307

Answer the question on the basis of the following data. All figures are in billions of dollars.
Gross Private Domestic Investment- 46
Exports of the US- 9
Disposable Income- 190
Personal Saving- 10
Government purchases- 84
Net foreign factor income- 10
consumption of fixed capital- 52
dividends- 13
imports of the us- 12
taxes on production/imports- 22
personal taxes- 38
SS contributions- 23
statistics discrepancy- 0
Refer to the above data. The gross domestic product is:

$255

Real GDP refers to:

GDP data that have been adjusted for changes in the price level.

Use the following table for a hypothetical single-product economy.
PICTURE 1
Refer to the above data. Nominal GDP in year 4 is:

$800

Assume an economy that makes only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the question on the basis of these data.
PICTURE 2
Refer to the above data. If year 3 is chosen as the base year, the price index for year 1 is:

60.

When an economy's production capacity is expanding:

gross domestic investment exceeds depreciation.

In an economy experiencing a persistently falling price level:

changes in nominal GDP understate changes in real GDP.

What is the difference between national income and personal income?

National income represents income earned by American-owned resources, while personal income measures received income, whether earned or unearned.

Suppose the total monetary value of all final goods and services produced in a particular country in 2010 is $500 billion and the total monetary value of final goods and services sold is $450 billion. We can conclude that:

GDP in 2010 is $500 billion.

Final goods and services refer to:

goods and services purchased by ultimate users, rather than for resale or further processing.

Net exports are:

exports less imports.

Government purchases include government spending on:

government consumption goods and public capital goods

Answer the question on the basis of the following national income data for the economy. All figures are in billions of dollars.
PICTURE 3
The gross domestic product for the above economy is:

$623

Answer the question on the basis of the following national income data for the economy. All figures are in billions of dollars.
PICTURE 4
Refer to the above data. Net domestic product is:

$580

Real GDP measures:

current output at base year prices.

Use the following table for a hypothetical single-product economy.
PICTURE 5
Refer to the above data. Real GDP in year 3 is:

$150

Economy A: gross investment equals depreciation
Economy B: depreciation exceeds gross investment
Economy C: gross investment exceeds depreciation

Refer to the above information. Positive net investment is occurring in:

economy C only.

In determining real GDP, economists adjust the nominal GDP by using the:

GDP price index.

In a typical year, which of the following measures of aggregate output and income is likely to be the smallest?

disposable income

Real GDP per capita is found by:

dividing real GDP by population.

PICTURE 6
Refer to the above table. Between years 1 and 2, real GDP grew by __________ percent in Alta.

5

Given the annual rate of economic growth, the "rule of 70" allows one to:

calculate the number of years required for real GDP to double.

Between 1950 and 2009, U.S. real GDP grew at an average annual rate of about:

3.2 percent.

Countries that have experienced modern economic growth have also tended to:

move toward more democratic forms of government.

Which of the following statements is most accurate about the prospects for poorer ("follower") countries catching up with richer ("leader") countries?

Catching up is possible as "follower countries" tend to grow faster than "leader countries."

Strong property rights are important for modern economic growth because:

people are more likely to invest if they don't fear that others can take their returns on investment without compensation.

Use the list below to answer the following questions:
1. Improvements in technology
2. Increases in the supply (stock) of capital goods
3. Purchases of expanding output
4. Obtaining the optimal combination of goods, each at least-cost production
5. Increases in the quantity and quality of natural resources
6. Increases in the quantity and quality of human resources

Refer to the above list. As distinct from the supply factors and efficiency factor of economic growth, the demand factor(s) of economic growth is (are):

3 only.

Suppose that an economy's labor productivity and total worker-hours each grew by 4 percent between year 1 and year 2. We could conclude that this economy's:

production possibilities curve shifted outward.

Labor productivity is defined as:

total output/worker-hours.

Empirical studies suggest that:

technological advances account for about 40 percent of U.S. productivity growth.

What percentage of the U.S. adult population has a college or post-college education (as of 2009)?

29 %

The annual growth of U.S. labor productivity:

was greater between 1995 and 2009 than between 1973 and 1995.

Proponents of economic growth say that pollution

occurs, not because of growth, but because common resources are treated as free goods.

The phase of the business cycle in which real GDP declines is called:

a recession.

An unexpected increase in total spending will cause an increase in GDP:

if prices are sticky.

During a severe recession, we would expect output to fall the most in:

the construction industry.

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions.
PICTURE 7
Refer to the above information. If the natural rate of unemployment in Scoob is 5 percent, then:

cyclical unemployment is about 2 percent.

The United States' economy is considered to be at full employment when:

about 4-5 percent of the labor force is unemployed.

The type of unemployment associated with recessions is called:

cyclical unemployment.

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:

$385 billion.

Okun's law:

shows the relationship between the unemployment rate and the size of the negative GDP gap.

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:

deflation of 3.33 percent.

The phrase "too much money chasing too few goods" best describes:

demand-pull inflation.

Cost-push inflation:

moves the economy inward from its production possibilities curve.

Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will:

rise by about 15 percent.

Inflation is undesirable because it:

arbitrarily redistributes real income and wealth.

Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:

7 %

(Last Word) Declines in stock prices measured by the Dow Jones average:

sometimes precede recessions; sometimes do not

Recurring upswings and downswings in an economy's real GDP over time are called:

business cycles.

Most economists agree that the immediate cause of most business cycle variation is:

an unexpected change in the level of total spending.

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions.
PICTURE 8
Refer to the above information. The labor force in Scoob is:

102 million

The natural rate of unemployment is the:

full-employment unemployment rate.

Structural unemployment:

may involve a locational mismatch between unemployed workers and job openings.

If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is:

$320 billion

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:

1.6 percent.

Inflation initiated by increases in wages or other resource prices is labeled:

cost-push inflation.

In 2005, Tatum's nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum's real income:

rose by approximately 3 percent.

Inflation affects:

both the level and the distribution of income.

Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:

3 %

The most important determinant of consumption and saving is the:

level of income

The consumption schedule shows:

a direct relationship between aggregate consumption and aggregate income.

Answer the question on the basis of the following consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars.
PICTURE 9
Refer to the above data. The marginal propensity to consume in economy (1) is:

.8.

The wealth effect is shown graphically as a:

shift of the consumption schedule.

PICTURE 10
Refer to the above graph. A movement from a to b along C1 might be caused by a:

increase in real GDP.

Which of the following will not tend to shift the consumption schedule upward?

the expectation of a future decline in the consumer price index

PICTURE 11
Refer to the above diagram. Consumption will be equal to income at:

an income of E

The investment demand curve portrays an inverse (negative) relationship between:

the real interest rate and investment.

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is:

20 percent.

The investment demand curve suggests:

there is an inverse relationship between the real rate of interest and the level of investment spending.

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

investment will take place until i and r are equal.

The investment demand curve will shift to the right as the result of:

businesses becoming more optimistic about future business conditions.

PICTURE 12
Which of the following would shift the investment demand curve from ID1 to ID3?

lower expected rates of return on investment

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but that there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be:

$10

The multiplier is:

1/MPS.

The relationship between consumption and disposable income is such that:

a direct and relatively stable relationship exists between consumption and income.

Other things equal, a decrease in the real interest rate will:

move the economy downward along its existing investment demand curve.

Assume a machine which has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is:

15 %

A decline in the real interest rate will:

increase the amount of investment spending.

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal

r will fall as more investment is undertaken

The investment demand curve will shift to the left as a result of:

an increase in the excess production capacity available in industry.

The multiplier can be calculated as:

1/(1-MPC)

Nominal GDP is adjusted for price changes through the use of:

the GDP price index.

If real GDP rises and the GDP price index has increased:

nominal GDP must have increased.

The amount of after-tax income received by households is measured by:

disposable income.

Between 1950 and 2009, U.S. real GDP per capita grew at an average annual rate of about:

2.0 %

The Industrial Revolution and modern economic growth resulted in:

the average human lifespan more than doubling.

As of 1998, living standards in the United States were nearly ______ times higher than those in Africa.

20

Use the list below to answer the following questions:
1. Improvements in technology
2. Increases in the supply (stock) of capital goods
3. Purchases of expanding output
4. Obtaining the optimal combination of goods, each at least-cost production
5. Increases in the quantity and quality of natural resources
6. Increases in the quantity and quality of human resources

Refer to the above list. As distinct from the supply factors and demand factor of economic growth, the efficiency factor(s) of economic growth is (are):

4 only

Suppose that an economy's labor productivity fell by 3 percent and its total worker-hours remained constant between year 1 and year 2. We could conclude that this economy's:

real GDP declined.

An economy is enlarging its stock of capital goods:

when gross investment exceeds replacement investment.

If depreciation exceeds gross investment:

the economy's stock of capital is shrinking.

If intermediate goods and services were included in GDP:

the GDP would be overstated.

Empirical studies suggest that:

technological advances account for about 40 percent of U.S. productivity growth.

The percentage of U.S. adults with a high school education or above has:

risen from 41 percent in 1960 to 87 percent in 2009.

The period in the U.S. economy from 1995 to 2009 is characterized by:

a higher trend rate of productivity growth.

Proponents of economic growth make all of the following arguments except:

There is a direct relationship between a growing real GDP and rising pollution.

The phase of the business cycle in which real GDP declines is called:

a recession.

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are:

capital goods and durable consumer goods.

The natural rate of unemployment is:

that rate of unemployment occurring when the economy is at its potential output.

If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is:

360 billion

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:

deflation of 3.33 percent.

Demand-pull inflation:

occurs when total spending in the economy is excessive

Inflation initiated by increases in wages or other resource prices is labeled:

cost-push inflation.

In 2005, Tatum's nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum's real income:

rose by approximately 3 percent.

Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:

3 %

The most important determinant of consumer spending is:

level of income

Which of the following will not tend to shift the consumption schedule upward?

the expectation of a future decline in the consumer price index

Other things equal, a decrease in the real interest rate will:

move the economy downward along its existing investment demand curve.

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is:

20 %

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when:

r is greater than i.

The investment demand curve will shift to the right as the result of:

businesses becoming more optimistic about future business conditions.

If business taxes are reduced and the real interest rate increases:

the level of investment spending might either increase or decrease.

The multiplier is defined as:

change in GDP/initial change in spending.

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