Macro econ test 2

A restaurant changes locations and sees a steep decline in business. Is this an example of market failure?,

No, it’s not market failure — the market is working properly by reallocating resources away from a business customers no longer value as much.

We should do all we can to increase female labor force participation. Is this a positive or normative statement?

Normative — it expresses a value judgment about what *should* be done.

Men are graduating from college at lower rates than women. Positive or normative?

Positive — it’s a factual statement that can be tested with data.

Jim buys a car for $5000. It was listed for $5500 but the owner was willing to sell for $4500. How much consumer surplus did Jim realize? How much surplus did the seller realize?

Consumer surplus = $500 ($5500–$5000); producer surplus = $500 ($5000–$4500).

We call externalities “spillovers.” Why do you think that is?

Because costs or benefits of a transaction “spill over” to third parties not directly involved in the exchange.

In the presence of market failure is there an argument for the state to intervene?

Yes — government intervention can correct externalities, provide public goods, and improve efficiency.

Ricky Bobby burns trash in his backyard. Might there be an externality problem? What does it depend on?

Yes — if the smoke or pollution affects neighbors or the environment

If public goods are left to the market will they be over- or under-provided? Why? 

 They’ll be under-provided because of the free-rider problem — individuals can enjoy the good without paying for it.

A swimming pool is excludable but not rival. Do you agree? Explain.

Yes — access can be restricted (excludable)

What problem arises with the “tragedy of the commons”?

Overuse and depletion of a common resource because individuals have incentives to consume without conserving.

What is GDP?

The market value of all final goods and services produced within a country in a given year — measuring total output

What is per capita GDP? How do you calculate it?

GDP divided by population; it shows average output or income per person.

Nashville buys ten cars for law enforcement. Is that included in GDP? Under what category?

Yes — counted under government spending (G).

A homeowner hires window cleaners. Included in GDP? What category?

Yes — counted as consumption (C).

A homeowner cleans their own windows. Included in GDP? What shortcoming does it illustrate?

No — it’s nonmarket production; illustrates GDP’s omission of household labor.

Ford buys steel to make cars. Included in GDP?

No — intermediate good; only the value of the final car is counted.

Tom buys a 2019 Toyota built in Alabama. Included in GDP?

Yes — counted in the year it was produced (2019)

Jim buys a 2025 Toyota built in Alabama. Included in GDP? What category?

Yes — counted under consumption (C).

On the spending side, what are the categories of GDP? ?

Consumption (C), Investment (I), Government (G), and Net Exports (NX).

About what fraction of GDP is consumption?

Roughly two-thirds (around 65–70%) each year.

Write out the production function. What does each input represent?

Y = f(L, H, K) — Labor (hours worked), Human capital (skills, education), and Physical capital (machines, infrastructure).

Does increasing women’s labor force participation raise growth?

Yes — it increases total labor supply; downside: potential costs or inefficiencies if policies distort choices or reduce child-rearing time.

If entrants > retirees what happens to GDP?

GDP rises due to more workers; if retirees > entrants, GDP falls.

What does (K/L) capture on a production function graph?

Capital per worker — how much equipment or capital each worker uses.

How does adopting new technology affect GDP?

It raises productivity and shifts the production function upward

What is convergence or catch-up growth?

Poorer countries grow faster by adopting existing technologies and accumulating capital

What is depreciation?

The loss of capital’s value over time due to wear

Why does political stability affect economic growth?

Stable governments protect property rights and encourage investment; coups or corruption discourage it.

Stokar has a working-age population of 100,000, with 62,436 employed and 4,567 unemployed. Calculate unemployment rate.

UR = (4,567 ÷ (62,436 + 4,567)) × 100 ≈ 6.8%.

Calculate Stokar’s labor force participation rate.

., LFPR = (62,436 + 4,567) ÷ 100,000 × 100 ≈ 67%.

A foreign firm hires 4,256 unemployed workers. What happens to unemployment and participation?,

Unemployment rate falls; participation rate unchanged.

What is the relationship between unemployment and GDP?

They are inversely related — when GDP rises unemployment falls

What is a discouraged worker?

Someone who has stopped looking for work because they believe no jobs are available.

Why is the unemployment rate never zero?

Because of frictional and structural unemployment even in healthy economies.

What does “sticky wages” mean?

Wages don’t easily adjust downward, keeping labor markets from clearing quickly.

Does unemployment insurance raise unemployment?

Slightly — it lengthens job searches by reducing the urgency to accept jobs

What are efficiency wages and why offer them?

 Wages above equilibrium that improve effort, reduce turnover, and attract higher-quality workers.