Economics Midterm

The natural rate of unemployment is

The sum of structural unemployment and frictional unemployment

When the economy is at full employment, unemployment is equal to

The natural rate of unemployment

Opportunity cost is

The highest valued alternative that must be given up to engage in an activity

How does the size of a countrys GDP affect the quality of life of the countyrs people?

Generally, the more goods and services people have, the better off they are

Scarcity implies that every society and every individual face​ trade-offs because scarcity means that

human wants are greater than what available resources can produce.

Which of the following is an example of structural​ unemployment?

Due to technological change, typewriter workers lose jobs and must retrain to find jobs in other industries.

Which of the following is considered to be a problem in using GDP as a measure of national

well-being​?

GDP is not adjusted to account for depletion of natural resources.

Which groups tend to have​ above-average unemployment​ rates, and which groups tend to have​ below-average unemployment​ rates?

Black teenagers as a group have lower unemployment rates than white teenagers.

What would happen to the unemployment rate and the labor force participation rate if homemakers were included in the labor force statistics?

The unemployment rate would decrease and the labor force participation rate would increase.

The natural rate of unemployment tends to be lower when…

Unemployment insurance benefits are lower.

The unemployment rate that includes discouraged workers and people working​ part-time who would prefer​ full-time jobs

is higher than the official unemployment​ rate, and the difference between the two grows larger in recessions.

In a market​ system, how does society decide who will receive the goods and services​ produced?

Who receives the goods and services produced depends largely on how income is distributed.

Why do economists believe that setting a goal of zero percent unemployment is not feasible or​ desirable?

Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because

the economy needs some​ short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets.

One major component of GDP that can be negative is

net exports.

Germany has a market economy. As such, Germany’s economy (relative to centrally planned economies) tends to result in

productive efficiency and allocative efficiency but not necessarily equity.

What are the four categories of​ income?

Wages, Interest,​ Rent, and Profit.

Which of the following equations sums up the components of Gross Domestic Product​ (GDP)?

Y = C + I + G + NX

Why are models based on​ assumptions?

Because models have to be simplified to be useful.

When a firm pays a wage that is higher than the market wage in order to increase worker​ productivity, the wage is called

an efficiency wage.

Economics assume that people are rational in the sense that…

They use all available information as they take actions intended to achieve their goals.

Gross domestic product is best defined as

the market value of all final goods and services produced in a country during a period of​ time, typically one year.

What happens if we measure GDP by adding up the value of every good and service produced in the​ economy?

GDP is overestimated because of double counting.

If inflation is expected to increase,

The nominal interest rate will increase

If the GDP deflator in 2012 has a value of​ 98.0, then

prices have decreased 2 percent between the base year and 2012.

In the circular flow of expenditure and​ income, why must the total value of production in an economy equal the total value of​ income?

Every penny spent on a good or service must end up as​ someone's income.

When economists develop models designed to explain the choices people​ make, they generally assume that

people are rational.

What are the four major categories of​ expenditure?

Consumption, investment, government​ purchases, and net exports.

The true cost of borrowing and lending is best measured by

the real interest rate.

The largest component of gross domestic income

wages

Since​ 1948, which of the following best describes the trend in the labor force participation rate

It is decreasing for men and increasing for women.

Suppose that the economy enters into a recession and​ that, as a​ result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy​ recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck​ mechanic?

Cyclically unemployed

A breakdown of the four components of GDP shows that

consumption is by far the largest expenditure​ category, and that consumer spending on services far exceeds consumer spending on goods.

Which of the following causes changes in the CPI to overstate the true inflation​ rate?

All of the above. Increase in quality bias. New product bias. Substitution bias.

Which of the following is an example of cyclical​ unemployment?

In an economic downturn, a manufacturing plant reduces production and temporarily lays off workers.

What is value added and how is it​ calculated?

Value added refers to

the additional market value a firm gives to a product and is calculated as the difference between the sale price and the price of intermediate goods.

Which of the following formulas does the Bureau of Labor Statistics use to calculate the unemployment​ rate?

Number of Unemployed / Number in labor force X 100.

If a​ 3-month Treasury bill pays​ 5.5% and the change in the consumer price index​ (CPI) is​ 4.7%, what is the real interest rate​ (the true return to​ lending)?

0.8%

One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls

scarcity

The difference between the nominal interest rate and the real interest rate is

the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.

We often use real GDP per capita as a measure of a country’s well-being. Review the definition of real GDP per capita before answering the following question.

Today, the typical American works fewer than 40 hours per week. In 1890 the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the populations economic well-being.

The increase in real GDP per capita between 1890 and today understates​ well-being because the value of leisure is not included in GDP.

Gross Domestic Product​ (GDP) is

the market value of all final goods and services produced in a country during a period of time.

The unemployment rate

rises during​ recessions, falls during​ expansions, and is always above

zero.

Suppose John Q. Worker is currently unemployed. Each​ day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of​ skills, abilities, and interests. If someone asks John Q. what he does for​ work, he tells them that he is currently​ "in-between jobs." Which of the following best classifies John​ Q.'s unemployment​ status?

Frictionally unemployed

Government unemployment insurance tends to

increase the unemployment rate by lowering the opportunity cost of job search.

The payment of government unemployment insurance reduces the severity of recessions by

preventing a huge drop in income and spending for the unemployed.

Consider an organization dedicated to helping​ low-income people. The members of the organization are discussing alternative methods of aiding the​ poor, when a proponent of one particular method​ asserts: "If even one poor person is helped with this​ method, then all our time and money would have been worth​ it." If you were a member of the​ organization, what reply best represents clear economic​ thinking? This attitude…

ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people.

The difference between a nominal variable and a real variable is that

nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.

When a significant fraction of domestic production takes place in​ foreign-owned facilities, a​ country's difference between GDP and GNP is as​ follows:

GDP will be much larger than GNP.

The difference between the price the firm sells a good for and the price the firm paid other firms for intermediate goods is called

value added.

Which of the following transactions is not counted in​ GDP?

A consumer repairs her own car.

Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called

structural unemployment.

The three types of unemployment are

frictional, structural, and cyclical unemploment.

The type of unemployment most likely to result in hardship for the people who are unemployed is

structural because this type of unemployment requires retraining to acquire new job skills.

One of the lessons from the economic growth model presented in this chapter is that technological change is

more important than increases in physical capital in explaining​ long-run growth.

Which of the following is most likely to lead to sustained​ long-run growth?

technological change

When examining economic growth rates throughout​ history,

the world experienced little to no growth until the industrial​ revolution, after which some economies began to experience real economic growth.

When a firm increases output by either replacing existing capital with more productive capital or by reorganizing how production takes​ place, that firm is experiencing

technological change.

Property rights have been determined to be a major factor that helps countries sustain economic growth. Governments can change laws and policies in order to give individuals and firms more freedom.

By doing​ so, government can help promote growth because greater property rights

give entrepreneurs more incentive to take risks that create new​ products, ideas, and more technology.

Between 1950 and the​ mid-1990s, the United States experienced a much larger increase in the standard of living than the Soviet Union.

This difference can be most attributed to the fact that the U.S.

had a greater amount of technological change.

Which of the following is a reason the U.S. experienced larger economic growth than the Soviet​ Union? CHECK ALL THAT APPLY

The U.S. had a greater amount of private property rights. AND. The U.S. had a market economy that allowed for greater entrepreneurship to occur.

Which of the following equals the amount of public​ saving?

Government tax revenue minus the sum of government purchases and transfer payments to households.

A government that collects more in taxes than it spends experiences

a budget surplus.

Potential GDP is

sometimes​ greater, sometimes​ less, and sometimes equal to actual real GDP.

When a corporation purchases or builds a facility in a foreign​ country, it is called

foreign direct investment.

Which countries have experienced faster economic​ growth?

countries that have been generally more open to foreign trade and investment

Globalization entails all of the following

except​:

Cultural exchange between nations.

Developing countries have benefited from​ globalization, because globalization can do all of the following except

impose trade barriers and tariffs on imported goods so as to protect domestic industries.

Which of the following changes does not cause an increase in the quantity of goods and services that can be produced by one​ worker, or in one hour of​ work?

an increase in the number of workers

Which of the following changes will ensure that an economy experiences sustained economic​ growth?

technological change

Following a long period of slow​ growth, the government of country X decided to open its economy and reduce trade barriers in order to boost economic growth. This provided the expected impetus to the economy as competition increased and the efficiency of domestic firms improved. A decade after opening the​ economy, the​ country's GDP is now growing at an average of​ 7-8 percent annually. A group of economists claim that the standard of living of the people has improved substantially during this period. They also expect this impressive growth to continue over the next five years.

Which of the​ following, if​ true, will indicate that the standard of living has actually improved since the economy was​ opened?

Discretionary spending by domestic consumers increased during this time.

Which of the following best describes creative destruction?

Technological change creates new products that drive old products out of the market.

​Long-run growth in GDP is determined by

​capital, labor​ productivity, and technology.

Technological progress is affected by ​(check all that​ apply)

new software developments, investment in capital, private property rights, entrepreneurship

Industries that produce

durable goods are more affected by recessions than is the economy as a

whole.

A​ country's rate of economic growth is important because

an economy that grows too slowly fails to raise the living standards of its citizens.

Which of the following is not a​ "loanable fund"?

Real estate.

Households supply loanable funds because of the

interest income received from the borrowers.

Businesses demand loanable funds because

firms need to borrow funds for new​ projects, such as building new factories or carrying out new research projects.

​Long-run economic growth in the United States is best measured using

real GDP per​ capita, which has been trending strongly upwards over the past

century.

What is the general relationship between the business cycle and unemployment and​ inflation?

During an​ expansion, unemployment falls and inflation increases.

The financial system—either financial markets or financial intermediates—provides savers and borrowers with all of the following except:

The financial system provides security to savers by warranting that their funds are fully insured against loss.

The ease with which a financial security can be exchanged for money is referred to as

liquidity.

Even though individuals earn interest on financial investments such as​ bonds, mutual​ funds, and certificates of​ deposits, they may still hold wealth in checking accounts because

individuals need money that is available to be spent on goods and services.

Firms that act as financial intermediates match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provide to savers and lenders? (Mark all that apply)

Allows savers to spread their money among many financial investments, Collects and communicates information about borrowers to savers, and Provides an easy method of exchanging a financial security for money.

Who developed a growth model that suggests new products unleash a​ "gale of creative​ destruction" that drives old products out of the​ market?

Joseph Schumpeter

Most of the poor countries experience slow growth because of all the following reasons except

excellent public health and education.

Capital can be differentiated between physical capital and human capital. Human capital is

the knowledge and skills workers acquire from education and training or from their life experiences

Which of the following is the best example of human​ capital?

a worker gets a college degree

The migration of highly educated and successful individuals from developing countries to​ high-income countries is called

the brain drain.