Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
39 Cards in this Set
- Front
- Back
|
If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as hamburgers. |
b. 15 |
|
|
Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby’s store to be sold later. What is GDP here? |
c. $80 |
|
|
Which of the following does NOT add to U.S. GDP?
|
d. the federal government sends a Social Security check to your grandmother. |
|
|
An American buys a pair of shoes manufactured in Italy. How do the U.S. national income accounts treat the transaction?
|
c. Net exports fall, while GDP is unchanged. |
|
|
Which is the largest component of GDP? |
a. consumption |
|
|
If all quantities produced rise by 10% and all prices fall by 10%, which of the following occurs? |
b. Real GDP is unchanged, while nominal GDP falls by 10% |
|
|
What components of GDP (if any) would each of the following transactions affect? Explain. 1.A family buys a new refrigerator. 2. Aunt Jane buys a new house. 3. Ford sells a Mustang from its inventory. 4. You buy a pizza. 5. California repaves Highway 101. 6. Your parents buy a bottle of French wine. 7. Honda expands its factory in Marysville, Ohio |
a. Consumptionincreases because a refrigerator is a good purchased by a household. b. Investment increases because a house is an investment good. c. Consumption increases because a car is a good purchased by ahousehold, but investment decreases because the car in Ford’s inventory hadbeen counted as an investment good until it was sold. d. Consumption increases because pizza is a good purchased by ahousehold. e. Government purchases increase because the government spent moneyto provide a good to the public. f. Consumption increases because the bottle is a good purchased by ahousehold, but net exports decrease because the bottle was imported. g. Investment increases because new structures and equipment werebuilt. |
|
|
The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded
|
Withtransfer payments, nothing is produced, so there is no contribution to GDP. |
|
|
As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?
|
IfGDP included goods that are resold, it would be counting output of thatparticular year, plus sales of goods produced in a previous year. It woulddouble-count goods that were sold more than once. This double-counting would make GDP a lessinformative measure of economic well-being because it would overstate the valueof production. |
|
|
Below are some data from the land of milk and honey. YearPrice of MilkQuantity of MilkPrice of HoneyQuantity of Honey2013 201420151.Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2013 as the base year. 2. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2014 and 2015 from the preceding year. For each year, identify the variable that does not change. Explain why your answer makes sense. 3. Did economic well-being rise more in 2014 or 2015? Explain. |
a. Calculatingnominal GDP: 2013: ($1 per qt. ofmilk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200 2014: ($1 per qt. ofmilk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400 2015: ($2 perqt. of milk ´ 200 qts. milk) + ($4 per qt. of honey ´ 100 qts. honey) = $800
Calculatingreal GDP (base year 2013): 2013: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200 2014: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400 2015: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
Calculatingthe GDP deflator: 2013: ($200/$200) ´ 100 = 100 2014: ($400/$400) ´ 100 = 100 2015: ($800/$400) ´ 100 = 200
b. Calculating the percentage change in nominal GDP: Percentage change in nominal GDP in2014 = [($400 – $200)/$200] ´ 100 = 100%. Percentage change in nominal GDP in2015 = [($800 – $400)/$400] ´ 100 = 100%.
Calculatingthe percentage change in real GDP: Percentage change in real GDP in 2014= [($400 – $200)/$200] ´ 100 = 100%. Percentage change in real GDP in 2015= [($400 – $400)/$400] ´ 100 = 0%.
Calculatingthe percentage change in GDP deflator: Percentage change in the GDP deflatorin 2014 = [(100 – 100)/100] ´ 100 = 0%. Percentage change in the GDP deflatorin 2015 = [(200 – 100)/100] ´ 100 = 100%.
Prices did not change from 2013 to 2014. Thus,the percentage change in the GDP deflator is zero. Likewise, output levels didnot change from 2014 to 2015. This means that the percentage change in real GDPis zero. c. Economic well-being rose more in 2014 than in 2015,since real GDP rose in 2014 but not in 2015. In 2014, real GDP rose but pricesdid not. In 2015, real GDP did not rise but prices did. |
|
|
The consumer price index measures approximately the same economic phenomenon as
|
c. the GDP deflator |
|
|
The largest component in the basket of goods and services used to compute the CPI is
|
b. housing |
|
|
If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase
|
d. the GDP deflator but not the CPI. |
|
|
Because consumers can sometimes substitute cheaper goods for those that have risen in price,
|
a. the CPI overstates inflation. |
|
|
If the consumer price index is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as today. |
d. $900 |
|
|
You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204. In this case, the nominal interest rate ispercent, and the real interest rate is percent. |
d. 5, 3 |
|
|
Suppose that the year you were born someone bought $100 of goods and services for your baby shower. How much would you guess it would cost today to buy a similar amount of goods and services? Now find data on the consumer price index and compute the answer based on it. |
Answers will vary.Students should multiply $100 by the CPI for the year in which they were bornand then divide by 100 |
|
|
The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2013, they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50 for 500 carrots. In 2014, they spend a total of $225 for 75 heads of cauliflower, $120 for 80 bunches of broccoli, and $100 for 500 carrots. |
a. Find the price ofone unit of each good in each year:
Year
Cauliflower
Broccoli
Carrots
2013 $2 $1.50 $0.10 2014 $3 $1.50 $0.20
b. If 2013 is the base year, the market basket used to compute theCPI is 100 heads of cauliflower, 50 bunches of broccoli, and 500 carrots. Wemust now calculate the cost of the market basket in each year: 2013: (100 × $2) + (50 × $1.50) + (500 × $0.10) =$325 2014: (100 × $3) + (50 × $1.50) + (500 × $0.20) =$475
Then, using 2013as the base year, we can compute the CPI in each year: 2013: $325/$325 × 100 = 100 2014: $475/$325 × 100 = 146
c. We can use the CPI to compute the inflation rate for 2014: (146 – 100)/100 × 100 = 46% |
|
|
Suppose that people consume only three goods, as shown in this table: Tennis BallsGolf BallsBottles of Gatorade2014 price2014 quantity2015 price2015 quantity1. What is the percentage change in the price of each of the three goods? 2. Using a method similar to the consumer price index, compute the percentage change in the overall price level. 3. If you were to learn that a bottle of Gatorade increased in size from 2014 to 2015, should that information affect your calculation of the inflation rate? If so, how? 4. If you were to learn that Gatorade introduced new flavors in 2015, should that information affect your calculation of the inflation rate? If so, how? |
a. The percentagechange in the price of tennis balls is ($2 – $2)/$2 × 100 = 0%. The percentagechange in the price of golf balls is ($6 – $4)/$4 × 100 = 50%. The percentagechange in the price of Gatorade is ($2 – $1)/$1 × 100 = 100%.
b. The cost of the market basket in 2014 is (100 x $2) + (100 x $4) +(200 x $1) = $800.
The cost of themarket basket in 2015 is (100 x $2) + (100 x $6) + (200 x $2) = $1,200.
Using 2014 asthe base year, we can compute the CPI in each year:
2014= ($800/$800) x 100 = 100 2015= ($1,200/$800) x 100 = 150
We can use theCPI values to compute the percentage change in the overall price level: (150-100)/100 x 100 = 50%.
c. This would lower my estimation of the inflation rate because thevalue of a bottle of Gatorade is now greater than before. The comparison shouldbe made on a per-ounce basis.
d. More flavors enhance consumers’ well-being. Thus, this would beconsidered a change in quality and would also lower my estimate of theinflation rate. |
|
|
A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts: 1. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2014 as the base year and fix the basket at karaoke machine and CDs. 2. Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Also use 2014 as the base year. 3. Is the inflation rate in 2015 the same using the two methods? Explain why or why not. |
a. The cost of themarket basket in 2014 is (1 × $40) + (3 × $10) = $70.
The cost of themarket basket in 2015 is (1 × $60) + (3 × $12) = $96.
Using 2014 as the base year, wecan compute the CPI in each year: 2014: $70/$70 × 100 = 100 2015: $96/$70 × 100 = 137.14
We can use the CPI to computethe inflation rate for 2015: (137.14 –100)/100 × 100 = 37.14%
b. Nominal GDP for 2014 = (10 × $40) + (30 × $10) = $400 + $300 =$700.
Nominal GDP for2015 = (12 × $60) + (50 × $12) = $720 + $600 = $1,320.
Real GDP for2014 = (10 × $40) + (30 × $10) = $400 + $300 = $700.
Real GDP for2015 = (12 × $40) + (50 × $10) = $480 + $500 = $980.
The GDP deflatorfor 2014 = ($700/$700) × 100 = 100.
The GDP deflatorfor 2015 = ($1,320/$980) × 100 = 134.69.
The rate ofinflation for 2015 = (134.69 – 100)/100 × 100 = 34.69%.
c. No, it is not the same. The rate of inflation calculated by theCPI holds the basket of goods and services constant, while the GDP deflatorallows it to change and holds the prices constant. |
|
|
The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for a job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the number of unemployed? |
a. 10 |
|
|
Using the numbers in the preceding question, what is the size of Ectenia’s labor force?
|
c. 70 |
|
|
The main policy goal of the unemployment insurance system is to reduce the
|
b. income uncertainty that workers face |
|
|
According to the most recent data, among workers who are paid at an hourly rate, about percent have jobs that pay at or below the minimum wage.
|
b. 15 |
|
|
Unionized workers are paid about percent more than similar nonunion workers.
|
c. 15 |
|
|
According to the theory of efficiency wages,
|
a. firms may find it profitable to pay above-equilibrium wages |
|
|
Between January 2010 and January 2013, U.S. employment increased by 4.9 million workers, but the number of unemployed workers declined by only 2.7 million. How are these numbers consistent with each other? Why might one expect a reduction in the number of people counted as unemployed to be smaller than the increase in the number of people employed?
|
The fact that employmentincreased 4.9 million while unemployment declined 2.7 million is consistentwith growth in the labor force of 2.2 million workers. The labor forceconstantly increases as the population grows and as labor-force participationincreases, so the increase in the number of people employed may exceed thereduction in the number unemployed. |
|
|
Economists use labor-market data to evaluate how well an economy is using its most valuable resource—its people. Two closely watched statistics are the unemployment rate and the employment–population ratio (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios. In your opinion, which statistic is the more meaningful gauge of how well the economy is doing? 1.An auto company goes bankrupt and lays off its workers, who immediately start looking for new jobs. 2. After an unsuccessful search, some of the laid-off workers quit looking for new jobs. 3. Numerous students graduate from college but cannot find work. 4. Numerous students graduate from college and immediately begin new jobs. 5. A stock market boom induces newly enriched 60-year-old workers to take early retirement. 6. Advances in healthcare prolong the life of many retirees. |
a. If an auto companygoes bankrupt and its workers immediate begin looking for work, theunemployment rate will rise and the employment-population ratio will fall.
b. If some of the unemployed auto workers give up looking for a job,the unemployment rate will fall and the employment-population ratio will remainthe same.
c. If numerous students graduate from college and cannot find work,the unemployment rate will rise and the employment-population ratio will remainunchanged.
d. If numerous students graduate from college and immediately beginnew jobs, the unemployment rate will fall and the employment-population ratiowill rise.
e. If a stock market boom induces earlier retirement, theunemployment rate will rise and the employment-population ratio will fall.
f. Advances in health care that prolong the life of retirees willnot affect the unemployment rate and will lower the employment-populationratio. |
|
|
Are the following workers more likely to experience short-term or long-term unemployment? Explain. 1.a construction worker laid off because of bad weather 2. a manufacturing worker who loses his job at a plant in an isolated area 3. a stagecoach-industry worker laid off because of competition from railroads 4. a short-order cook who loses his job when a new restaurant opens across the street 5. an expert welder with little formal education who loses his job when the company installs automatic welding machinery |
a. A constructionworker who is laid off because of bad weather is likely to experienceshort-term unemployment, because the worker will be back to work as soon as theweather clears up.
b. A manufacturing worker who loses his job at a plant in an isolatedarea is likely to experience long-term unemployment, because there are probablyfew other employment opportunities in the area. He may need to move somewhereelse to find a suitable job, which means he will be out of work for some time.
c. A worker in the stagecoach industry who was laid off because ofthe growth of railroads is likely to be unemployed for a long time. The workerwill have a lot of trouble finding another job because his entire industry isshrinking. He will probably need to gain additional training or skills to get ajob in a different industry.
d. A short-order cook who loses his job when a new restaurant opens islikely to find another job fairly quickly, perhaps even at the new restaurant,and thus will probably have only a short spell of unemployment.
e. An expert welder with little education who loses his job when thecompany installs automatic welding machinery is likely to be without a job fora long time, because he lacks the technological skills to keep up with thelatest equipment. To remain in the welding industry, he may need to go back toschool and learn the newest techniques.
Demand
Figure 2
|
|
|
The money supply includes all of the following EXCEPT
|
c. lines of credit accessible with credit cards |
|
|
hloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply , but if the bank lends out some of the $100, the money supply . |
c. is unchanged, increases |
|
|
If the reserve ratio is ¼
and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by and the central bank increases the quantity of reserves in the banking system by $120, |
d. $480 |
|
|
A bank has capital of $200 and a leverage ratio of 5. If the value of the bank’s assets decline by 10%, then its capital will be reduced to |
a. $100 |
|
|
Which of the following actions by the Fed would reduce the money supply? |
c. an increase in the interest rate paid on reserves |
|
|
In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold currency or if banks choose to hold excess reserves.
|
a. more, more |
|
|
Which of the following are considered money in the U.S. economy? Which are not? Explain your answers by discussing each of the three functions of money. 1.a U.S. penny 2. a Mexican peso 3. a Picasso painting 4. a plastic credit card |
a. A U.S. penny isconsidered money in the U.S. economy because it is used as a medium of exchangeto buy goods or services, it serves as a unit of account because prices instores are listed in terms of dollars and cents, and it serves as a store ofvalue for anyone who holds it over time.
b. A Mexican peso is not considered money in the U.S. economy,because it is not used as a medium of exchange, and prices are not given interms of pesos, so it is not a unit of account. It could serve as a store ofvalue, though.
c. A Picasso painting is not considered money, because you cannotexchange it for goods or services, and prices are not given in terms of Picassopaintings. It does, however, serve as a store of value.
d. A plastic credit card is similar to money, but represents deferredpayment rather than immediate payment. So credit cards do not fully representthe medium of exchange function of money, nor are they stores of value, becausethey represent short-term loans rather than being an asset like currency. |
|
|
our uncle repays a $100 loan from Tenth National Bank (TNB) by writing a $100 check from his TNB checking account. Use T-accounts to show the effect of this transaction on your uncle and on TNB. Has your uncle’s wealth changed? Explain. |
When your uncle repays a $100loan from Tenth National Bank (TNB) by writing a check from his TNB checkingaccount, the result is a change in the assets and liabilities of both youruncle and TNB, as shown in these T-accounts:
Your Uncle
Assets
Liabilities
Before:
Checking Account $100 Loans $100 After:
Checking Account $0 Loans $0
Tenth National Bank
Assets
Liabilities
Before:
Loans $100 Deposits $100 After:
Loans $0 Deposits $0
By paying off the loan, your uncle simply eliminated theoutstanding loan using the assets in his checking account. Your uncle's wealthhas not changed; he simply has fewer assets and fewer liabilities. |
|
|
The Fed conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10%, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain. |
Witha required reserve ratio of 10%, the money multiplier could be as high as1/0.10 = 10, if banks hold no excess reserves and people do not keep someadditional currency. So the maximum increase in the money supply from a $10million open-market purchase is $100 million. The smallest possible increase is$10 million if all of the money is held by banks as excess reserves. |
|
|
Suppose that the reserve requirement for checking deposits is 10% and that banks do not hold any excess reserves. 1.If the Fed sells $1 million of government bonds, what is the effect on the economy’s reserves and money supply? 2. Now suppose the Fed lowers the reserve requirement to 5%, but banks choose to hold another 5% of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions? |
a. With a requiredreserve ratio of 10% and no excess reserves, the money multiplier is 1/0.10 =10. If the Fed sells $1 million of government bonds, reserves will decline by$1 million and the money supply will contract by 10 × $1 million = $10 million.
b. Banks might wish to hold excess reserves if they need to hold thereserves for their day-to-day operations, such as paying other banks forcustomers' transactions, making change, cashing paychecks, and so on. If banksincrease excess reserves such that there is no overall change in the totalreserve ratio, then the money multiplier does not change and there is no effecton the money supply.
|
