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Chapter 6 Practice Quiz 1. Suppose the county had a nominal GDP of $ 48 billion in 2007 and the price level is 50 in 2007. What was a real GDP in 2007? $96 billion 2. Which of the following is correct? A newly constructed home is a part of investment spending. 3. Which of the followings is correct? Real GDP always increases when there is an inflation. 4. Which of the following transactions would be included in this year's GDP? Claire's purchase of a Nissan minivan that was produced in Tennessee 5. Business cycles are short-term movements in real GDP around real GDP's long-term trend. 6. Which one of the following transactions would be included in a current year's GDP as investment spending? Cameron bought a play-gym set for his daycare business. 7. When a chef creates a dinner plate of food for a customer, which of the following represents physical capital resource? the oven 8. Which of the following is not correct? When George buys a new computer for his business, it is included in GDP as service, and when he buys a new computer for use at home, it counts as consumption. 9. In the economy of Game of Thrones, the economy produces 500 units of swords, 1,000 units of arrows, and 200 units of archery bows in 2012. In 2012, swords cost $2, arrows cost $4, and archery bows $2. In 2013, the economy of Game of Thrones produced 600 units of swords, 900 units of arrows, and 300 units of archery bows in 2013. Each costs $2.50, $5, and $1 in 2013. Base year is 2012. Which of the following is not correct? The growth rate of real GDP 2012-2013 is 1.67%. 10. Which of the following is not correct? Farmer Bill grows wheat and sells it to the miller for $50,000. The miller turns it into flour and sells it to the bakery for $75,000. The bakery uses the flour in the bread that it sells to people for $90,000. The total contribution to GDP is $215,000. 11. If a country’s Net Exports are negative for a given year, then during that year the sum of Consumption Spending, Government Spending, and Investment Spending for that country is greater than the total market value of final goods and services produced in that country during that year. 12. Activities that would be included in the calculation of GDP for the United States: -Prime Cuts, of Atlanta, Georgia, provides a haircut in Lawrence for $25, to Sally Smith a citizen of England, who is attending the University. -A Japanese rock star is paid $25,000 to perform a concert in Atlanta, U.S.A. -The Honda Motor Company, of Japan, produces a Honda Accord in Macon, U.S.A. 13. In 2004, U.S. nominal GDP equaled $11,735 billion and U.S. real GDP equaled $10,836 billion. What accounts for the difference between nominal and real GDP?

2004 nominal GDP is calculated using 2004 prices and real GDP is calculated using the prices of a base year. 14. Which statement represents most correctly the relationship between nominal GDP and real GDP? Nominal GDP measures current production using current prices, while real GDP measures current production using base-year prices. 15. The following are national income accounting figures for a hypothetical country for a given year. Consumption Spending $700 Investment Spending $100 Government Spending on Goods and Services $200 Exports $300 Imports $400 Then GDP is equal to $900. 16. The following figures are for a country in 2006, expressed in billions of dollars: GDP 2,000 Consumption 1,000 Investment 500 Government Tax Revenue 400 Exports 300 For this country in 2006 the value of Imports, expressed in billions of dollars is >It can’t be determined with the given information< 17. The following table contains data for five hypothetical countries: Country A, Country B, Country C, Country D, and Country E. Country

2006 Population

A

1,000

B

2,000

C

3,000

D

4,000

E

5,000

Which Country had the highest GDP per capita in 2006? Country A 18. Sometimes in the U.S. we have seen Nominal GDP increasing while Real GDP was declining. During such time the following could be happening:  output of goods and services declining and prices increasing 19. Which of the following is counted in the Investment expenditure category for GDP?

Gail Penn purchases a $1,000 printing machine for her tee-shirt printing business. 20. Which statement represents most correctly the relationship between nominal GDP and real GDP? Nominal GDP measures current production using current prices, while real GDP measures current production using base-year prices. 21. Listed below is the Nominal GDP and the GDP deflator for the years 2000 and 2001 for a hypothetical country. Year Nominal GDP GDP deflator 2000 $1,000 50 2001 $1,100 60 As measured by the GDP deflator, what was the rate of inflation in 2001? 20% 22. The following figures are for a country in 2006 are expressed in billions of dollars: Consumption 5,000 Government Spending 1,000 Net Exports 3,000 GDP 15,000 The value of Investment expenditure, expressed in billions of dollars, was 600. 23. The country of Fruitland produces two goods: apples and oranges. The prices and output of these goods are shown for the years 2005 and 2006. Year 2005 Year 2006 Quantity Price Quantity Price Apples 5 $1 6 $2 Oranges 5 $1 5 $1 Nominal GDP for Fruitland in 2005 and 2006 are $10 in 2005 and $17 in 2006. 24. Suppose that Laurence is a country in which only basketballs and footballs are produced. The table shows the quantity produced and the prices of each of the two goods for 2003 and 2004. 2003 2004 Quantity Price Quantity Price Basketballs 2 $2 3 $2 Footballs 1 $1 1 $2 The base year is 2003. Real GDP in 2003 is $5 and real GDP in 2004 is $7. 25. Listed below is the Nominal GDP and the GDP deflator for the years 2005 and 2006 for a hypothetical country. Year Nominal GDP GDP deflator 2005 $200 100 2006 $231 110 In this country, for 2006 the rate of inflation, as measured by the GDP deflator, is 10% and the rate of growth of real GDP in 2006 is 5%.

26. The following is GDP data for a hypothetical country: Year GDP 2000 $100 2001 $110 2002 $120 2003 $130 The 2002 percentage rate of GDP growth is given by which expression? (110-100/110) x 100% 27. If a country’s Net Exports are negative for a given year, then during that year the sum of Consumption Spending, Government Spending, and Investment Spending for that country is greater than the total market value of final goods and services produced in that country during that year. 28. The country of Fruitland produces two goods: apples and oranges. The prices and output of these goods are shown for the years 2002 and 2003. Year 2002 Year 2003 Quantity Price Quantity Price Apples 20 $2 30 $4 Oranges 10 $2 10 $2 Use 2002 as the base year for the calculation of Real GDP. Real GDP for Fruitland in 2002 and 2003 are $60 in 2002 and $80 in 2003. 29. Which of the following contributions to economics well-being are not accounted for in the measurement of GDP? 1. Vegetables grown in a family garden and consumed by the family. 2. Leisure time 3. Improvements in air quality which results from reduced industrial production. 30. If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is real GDP? $20 billion 31. Suppose that on October 1, 2005 Alice buys a new Explorer that was built by the Ford Motor Company in Detroit during the month of February, 2005. Also on October 1, 2005 Bob buys a used Toyota Camry which was built in Kentucky during the month of February, 2001. The value of the Explorer is counted in U.S. 2005 GDP but the value of the Camry is not counted in U.S. 2005 GDP. That is because the Explorer was produced during 2005 and the Camry was not produced during 2005. Chapter 7 Practice Quiz Notes 1. Due to an increase in minimum wage, some workers lose their job while they still want to work. This is an example of structural unemployment. 2. Which of the following situation would be considered cyclical unemployment? A worker on the assembly line at Chevy Truck is laid off due to a drop in truck sales brought on by a weak economy 3. The economist has natural rate of unemployment 5% and actual unemployment rate 3.5%. The information provided above reflects an economy that is expanding.

4. In this economy, the size of labor force is 179 million. The number of people who do not have jobs and currently look for ones is 18 million. The number of people who are not in labor force is 95 million. Which of the following is correct? The unemployment rate is 10.05% 5. Which of the following is correct? An unemployment rate that is above the natural rate indicates a positive cyclical unemployment, and we say that the economy is producing at less than the fullemployment output level. 6. CBO reports says that a broader measure of underutilization in the labor market (known as U-6) has risen even more than the standard measure of unemployment. U-6 measures labor underutilization that includes discouraged workers, marginally attached workers and the underemployed workers. 7. CBO’s estimate of the natural rate of unemployment declines similarly with 5.5 percent. Those improvements reflect diminishing effects of structural factors associated with longterm unemployment (namely, the stigma of being unemployed for a long time and the erosion of skills that occurs), which contribute about one-quarter of a percent- age point to the projected natural rate in 2024, down from about one-half of a percentage point in 2017. Those effects will fade as some of the people unemployed for a long time retire (or otherwise permanently withdraw from the labor force) and as others eventually obtain stable jobs. A current actual unemployment is 6.6%. With the given information, cyclical unemployment is 1.1%. 8. The following is from NPR. "Jobless rate ticks up, but job growth is better than expected" "The nation's unemployment rate edged up to 6.7 percent in February from 6.6 percent the month before. There's also a case to be made that the slight rise in the jobless rate was caused, at least in part, by a positive trend: BLS says the size of the civilian labor force grew by about 264,000 and that the number of people classified as "discouraged workers" declined to 755,000 from 837,000. Those are signs that many Americans have re-entered the labor force. As they come back into the pool, though, the unemployment rate can edge up even as employers add jobs." Why this report says that the labor market is optimistic, when unemployment rate went up from a previous month? Because the number of discouraged workers has fallen and became unemployed as they became optimistic. 9. If your boss calls you into her office and offers you a promotion, which will include a 7% pay increase, how would you evaluate the value of your raise? Very good, since the rate of inflation is 2%. 10. This economy has a consumer's typical basket of goods; Gas 250 gallons, Shirts 10 units. In 2010, gas price was $3.15 per unit, and shirt price was $20 per unit. In 2011, gas price was $3.50 per unit, and shirt price was $25 per unit. 2010 is used as a base year. What is CPI in 2011? 113.92 11. Suppose that the economy calculates price index of golf. The residents of the economy buy golf balls, clubs, and tees. In 2010, they bought 2,000 golf balls for $3 each, 200

clubs for $80 each, and 1,000 tees for $0.10 each. In 2011, they bought 2,100 golf balls for $4 each, 250 clubs for $100 each, and 1,500 tees for $0.20 each. Using 2010 as the base year, what was the inflation rate 2010 - 2011? 27.6% 12. Which of the following is correct? As a business owner, you find that your resource prices are increasing often. Because these costs are rising, you find it necessary to change your prices frequently. This best describes menu costs. 13. Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator? The CPI measures the average prices of typical goods consumed by consumers, whereas the GDP deflator measures the average prices of goods produced in the economy. 14. Which of the following is not correct? The major difference between the CPI and the producer price index is that the producer price index is based on retail prices and CPI is based on wholesale prices. 15. Which of the followings is not correct? Suppose the real interest rate is 2.1% and the nominal interest rate is 5.4%. Then the inflation rate is –3.3%. 16. Amy just graduated from college. She recently quit her part time job to focus on finding a full time job which uses her skills she has acquired in college better. Amy is considered: frictionally unemployed. 17. Low unemployment rates are often indicative of the ease of finding a job. 18. A wage offered by an employer that exceeds the equilibrium wage rate as an incentive for greater work effort and performance is known as the efficiency wage. 19. Analysts believe that generous unemployment benefits in Europe are associated with high unemployment rates in Europe. 20. Scenario: Employment Rate 21. In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. For this group, if the discouraged workers became active job searchers, then the: unemployment rate and the labor force participation rate would rise. 22. Unemployment rates tend to vary depending upon age groups and ethnicities. 23. An effective minimum wage can lead to structural unemployment. 24. In a particular labor market, the demand for labor is given by W=20-(1/100) L and the supply of labor is given by W=4+ (1/100) L where W is the wage rate, and L is the number of workers. Suppose government decides to impose a minimum wage of $15 in this market. What effect will this minimum wage have on the market? The wage will create surplus of workers since it is above the equilibrium wage. 25. Structural unemployment occurs when there is a surplus of labor at the current wage rate. 26. A binding minimum wage results in greater amounts of structural unemployment. 27. In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. For this group, the labor force participation rate is 50%. 28. Structural changes in an economy as well as changes in consumer tastes are reasons for job creation and job destruction. 29. An efficiency wage is offered by an employer to encourage workers to work harder.

30. To be classified as unemployed, a worker must not have a job and must be actively looking for work. 31. Sally works twenty hours a week for an accounting firm. She would like to work full time and expects that she will in the future. Sally is an underemployed worker. 32. In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. For this group, the unemployment rate is 20%. 33. Unemployment rates tend to decrease when there is an expansion in the economy. 34. Looking at past data, one finds that when the unemployment rate has increased, the annual growth rate of real GDP has decreased. 35. Labor unions that are effective at achieving wage rates higher than the equilibrium wage rate may also result in structural unemployment. 36. The sum of frictional and structural unemployment make up the natural rate of unemployment. 37. The natural rate of unemployment equals the actual rate of unemployment when cyclical unemployment equals zero. 38. In a particular labor market, the demand for labor is given by W=20-(1/100) L and the supply of labor is given by W=4+ (1/100) L where W is the wage rate, and L is the number of workers. What is the equilibrium wage and number of workers in this market? The equilibrium wage is $12, and the equilibrium number of workers is 800. 39. Frictional unemployment is due to the time workers spend in job search. 40. The natural rate of unemployment changes when there are changes in labor market institution. 41. The presence of discouraged workers causes the actual unemployment rate to understate the true level of unemployment. 42. A binding minimum wage results in greater amounts of structural unemployment. Chapter 8 Practice Quiz Notes 1. Real per capita GDP in country X is eight fold in 140 years. What would be the average growth rate of real per capita GDP in country X? 1.5% 2. The convergence hypothesis seems to hold only when other things such as educations and infrastructure are held equal. 3. What is the approximate annual growth rate of a country whose living standard can double in 80 years? 0.875% 4. All of the following qualifies as a capital in economics except bonds and stocks. 5. Between 2013 and 2014, the economy experienced a growth rate of 1.8% in real GDP per capita. If nominal GDP had increased by 3% and the population growth was 1%, then the annual inflation rate would be 0.2% 6. Which of the following is not correct? According to Solow growth theory, the developing nations should never be as wealthy as the already developed nations. 7. Which of the following is not correct? In 2010, per capita real gross domestic product (GDP) in Germany was $40,197.67. By 2011, it had increased to $43,741.55. Germany's economy grew at 5.53%.

8. Which of the following moves would have been most likely to result from an increase in domestic savings? (assuming all else equal) A to B 9. Below shows aggregate production function in the economy.

Which of the following is not correct? This production function exhibits increasing returns to capital. 10. Technological change results in increases in total factor productivity. 11. Which of the following best describes the substitution bias that may exist in the Consumer Price Index (CPI). The CPI measures the cost of a fixed bundle of goods and services. If the price of some of those goods and services increases a lot, consumers may change the bundle of goods they buy in response to the price change, purchasing fewer of the goods which have become more expensive and more of the goods which have not become more expensive. As a result the cost of living for those consumers may not increase as much as the cost of the fixed bundle of goods and services which is used to compute the CPI. 12. In 1964 the lecture instructor for this course went to work at McDonald’s for$1.25 per hour, which was the Federal Minimum Hourly Wage in 1964. In 2006 the Federal Minimum Hourly Wage was $5.15. Year CPI 1964 31 2006 202 According to the CPI, approximately what would the minimum wage need to be in 2006 in order for it to have the same purchasing power as $1.25 in 1964? $8.15 13. Consider a hypothetical College Student Price Index (CSPI), based upon a survey of monthly purchases of a typical college student. To keep the problem simple, we will pretend that college students buy only three commodities: Pizza, Hamburgers, and Coffee. Information market basket used for the price index is given in the table below. The prices of the commodities for three years are also given in the table. The base year is 2000. Good Quantity 2000 2001 2002 Pizzas 10 $10 $13 $15 Hamburgers 20 $5 $5 $7 Cups of Coffee 50 $2 $2 $3 The value of the CSPI in 2001 is 110. 14. The following table contains Consumer Price Index information for a hypothetical country for several years. The base year is 1983. Year

CPI

2000 200 2001 210 2002 220 2003 230 2004 240 For which year was the rate of inflation highest? 2001

15. Suppose that the Fast Food Price Index (FFP) is based upon a survey of the monthly purchases at fast food restaurants of a typical college student. Information on the market basket for the FFP and the prices for each of the goods in 2005, which is the base year, and in 2006 is shown below. Good Quantity 2000 2001 Pizzas 10 $2 $2 Hamburgers 5 $2 $2 Cups of Coffee 4 $5 $10 According to the FFP, what is the rate of inflation in 2006? 40% 16. Suppose that Mary earned $20 per hour in 1990 and $30 per hour in 2000. Suppose that Mary spends all her income on pizzas. In 1990 the price of a pizza was $5. In 2000 the price of a pizza was $10. From 1990 to 2000 Mary’s nominal wage increased but her real wage declined. 17. In 1997 the U.S. Federal Minimu...