ECO 119

Chapters 2, 3, 4, 5, 20

When a firm sells a product out of inventory, GDP:

Is not changed

In computing GDP:

the value of intermediate goods is included in the market price of the final goods

When a firm sells a product out of inventory, investment expenditures BLANK, and consumption expenditures BLANK

decrease; increase

Real GDP is a better measure of economic well-being than nominal GDP because real GDP:

measures changes in the quantity of goods and services products by holding prices constant

A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as her husband rather than as her wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage:

decreases GDP by $60,000

Two equivalent ways to view GDP are as the:

total income of everyone in the economy or the total expenditure on the economy’s services

A fixed-weight price index like the CPI BLANK the change in the cost of living because it BLANK take into account that people can substitute less expensive goods for ones that have become more expensive

overestimates; does not

A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. When the engineer eats the bread, what is the value added by each person? What is the bread’s contribution to GDP?

The farmer’s added value is $1

The miller’s added value is $2

The baker’s added value is $3

The bread’s contribution to GDP is $6

When bread is baked but put away for later sale, this is called:

investment in inventory

In the long run, the level of national income in an economy is determined by its:

factors of production and production function

unlike the real world, the classical model with fixed output assumers that:

capital and labor are fully utilized

An increase in the supply of capital will

decrease the real rental price of capital

consumption depends BLANK on disposable income, and investment depends BLANK on the real interest rate

positively; negatively