econ exam 3

A bakery buys 50 pounds of sugar to make cakes, and a family buys a birthday cake from that bakery. Which transaction counts directly toward GDP?

A) Only the sugar purchase, because sugar is a physical good

B) Only the cake purchase, because the cake is the end product sold to consumers

C) Both, because each involves a market transaction

D) Neither, because food is a necessity and not a luxury

B

Your friend says GDP is "the total amount of money flowing through the

economy." Which of the following would be a more precise definition?

A) The sum of every dollar the federal government spends in a year

B) The combined revenue of every corporation headquartered in the country

C) The total dollar value of all final goods and services produced within a country's borders over

a set period, such as one year

D) A running total of everything the nation has ever manufactured since its founding

C

GDP

the total market value of all final goods and services produced in a given time period within a country's borders

intermediate good

good that gets used up in production

final good

a good sold to final users; enters GDP

In the circular-flow diagram, money flows from firms to households. What do households provide in return to earn this money?

A) Finished consumer products

B) Tax revenue for public projects

C) Labor, land, and capital—the factors of production that firms need to operate

D) Imported raw materials

C

what to firms give to households?

wages, rent, profit

what do households give to firms?

labor, land, captial

Why must the total income earned in the economy equal the total amount spent on goods and services?

A) A law requires the Treasury to balance them

B) Whoever pays for a product is simultaneously providing income to the seller

C) GDP is defined to be positive, so income and spending must match

D) Exports and imports always cancel out

B

Marcus receives a monthly $1,500 veterans' benefit check. Why does this payment, by itself, not add to GDP?

A) Because veterans are not part of the labor force

B) Because the government is not getting a newly produced good or service in return for that

payment

C) Because the check is too small relative to total government spending

D) Because only cash transactions between private citizens count in GDP

B

transfer payment

government redistributing money; does not enter GDP until that money is spent on American-made goods

How do transfer payments differ from government purchases?

A) Transfer payments go to businesses; government purchases go to individuals

B) Transfer payments are always larger than government purchases

C) Government purchases pay for newly produced output (roads, teacher salaries), whereas trans-

fers simply redistribute money without any production attached

D) There is no difference; both count equally in GDP

C

Consider four people on a Saturday afternoon: Lisa pays a dog groomer $60, Tom hires a math tutor for $40, Priya cooks an elaborate dinner for her family, and James buys a concert ticket for $75. Whose activity does not show up in GDP?

A) Lisa's dog grooming

B) Tom's tutoring session

C) Priya's home-cooked dinner

D) James's concert ticket

C

Priya's cooking is household production—valuable, but not sold in any market. The dog groomer, the tutor, and the concert venue all involve a market transaction with a price, so they are in GDP.

Helen, a retired seamstress, sews a quilt for her living room using fabric scraps she already owned. What happens to GDP?

A) GDP increases by the retail price of a similar quilt at a store

B) GDP increases by the cost of the fabric scraps

C) GDP increases by the value of Helen's labor hours

D) Nothing happens to GDP—the quilt never entered any marketplace, so the national accounts

do not register it

D

A chemical plant produces output worth $2 million but causes water pollution that costs the town $300,000 in cleanup. How does GDP treat the pollution damage?

A) It subtracts $300,000 from GDP

B) It ignores the damage entirely, which is a well-known shortcoming of GDP

C) It adds the cleanup cost to GDP as additional output

D) It reduces GDP by the full $2 million

B

GDP does not subtract environmental harm

Rosa receives a $3,000 tax refund from the government. She spends $900

on a Japanese-made camera, $600 on shoes assembled in Vietnam, and $1,500 on a vacation at a

resort in Florida. How much does U.S. GDP rise?

A) $3,000

B) $2,100

C) $1,500

D) $0

C

nominal GDP =

sum of (current year price x current year quantity)

An economy produces only hats and scarves. Use 2025 as the base year.

Year Price of Hats Qty of Hats Price of Scarves Qty of Scarves

2023 $6 300 $4.00 800

2024 $7 350 $5.00 900

2025 $9 400 $6.00 1,100

What is Nominal GDP in 2024?

Nominal GDP 2024 = ($7 × 350) + ($5 × 900) = $2,450 + $4,500 = $6,950

real GDP =

sum of (base year price x current year quantity)

Year Price of Hats Qty of Hats Price of Scarves Qty of Scarves

2023 $6 300 $4.00 800

2024 $7 350 $5.00 900

2025 $9 400 $6.00 1,100

What is real GDP in 2023?

Real GDP 2023 = ($9 × 300) + ($6 × 800) = $2,700 + $4,800 = $7,500

GDP deflator =

nominal GDP/real GDP x 100

Year Price of Hats Qty of Hats Price of Scarves Qty of Scarves

2023 $6 300 $4.00 800

2024 $7 350 $5.00 900

2025 $9 400 $6.00 1,100

What is the GDP Deflator in 2023?

Nominal GDP in 2023 = ($6 × 300) + ($4 × 800) = $1,800 + $3,200 = $5,000

Real GDP in 2023 = $7,500 (from Question 12)

GDP Deflator 2023 = 5,000/7,500 × 100 = 66.67

inflation rate =

(year 2 deflator - year 1 deflator)/year 1 deflator x 100

What is the inflation rate from 2023 to 2024 using the GDP deflator?

Nominal GDP in 2024 = $6,950 (from Question 11)

Real GDP in 2024 = ($9 × 350) + ($6 × 900) = $3,150 + $5,400 = $8,550

Deflator 2024 = 6,950/8,550 × 100 = 81.29

Inflation = (81.29 − 66.67)/66.67 × 100 = 14.62/66.67 × 100 = 21.93%

A senator boasts that the country's nominal GDP expanded by 18% over her six-year term. Economists note that the price level climbed by 7% and the population grew by 5% over the same period. What actually happened to real GDP per person?

A) It surged by 18%

B) Living standards improved, but the gain is far smaller than the headline 18% figure suggests

C) It did not change at all

D) It declined

B

Real GDP growth ≈ 18% − 7% = 11%. Real GDP per person ≈ 11% − 5% = 6%

steps to construct cost of living (CPI)

1. Fix the basket of goods and services (decide what a typical consumer buys).

2. Find the prices of each item in the basket for each year.

3. Compute the basket's cost in each year.

4. Choose a base year and compute the CPI.

5. Compute the inflation rate from year to year.

A government statistician begins building a new price index. What should she do first?

A) Pick which year will serve as the baseline

B) Determine which products and quantities represent a typical consumer's purchases

C) Calculate the percentage change in prices

D) Survey stores for current prices

B

basket cost =

sum of (price in year X x fixed basket quantity)

A market basket consists of 80 burritos and 150 smoothies. Prices are:

Year Price of Burrito Price of Smoothie

2023 $7.00 $4.00

2024 $9.00 $5.00

2025 $11.00 $6.00

What does the basket cost in 2024?

(80 × $9) + (150 × $5) = $720 + $750 = $1,470

CPI in year X =

(basket cost in year X/basket cost in base year) x 100

A market basket consists of 80 burritos and 150 smoothies. Prices are:

Year Price of Burrito Price of Smoothie

2023 $7.00 $4.00

2024 $9.00 $5.00

2025 $11.00 $6.00

Using 2025 as the base year, what is the CPI in 2024?

Basket cost in 2025 (base year):

(80 × $11) + (150 × $6) = $880 + $900 = $1,780

CPI 2024 = (1,470/1,780) × 100 = 82.6

Suppose a different price index uses a basket that costs $620 in its base year and $682 today. What is today's index value?

(682/620) × 100 = 110.0

divide today's cost by the base-year cost, multiply by 100

inflation rate from CPI =

(CPI year 2 - CPI year 1)/CPI year 1 x 100

A market basket consists of 80 burritos and 150 smoothies. Prices are:

Year Price of Burrito Price of Smoothie

2023 $7.00 $4.00

2024 $9.00 $5.00

2025 $11.00 $6.00

What is the inflation rate from 2024-2025?

CPI 2024 = 82.6 and CPI 2025 = 100 (base year).

Inflation = (100 − 82.6)/ 82.6 × 100 = 17.4/82.6 × 100 = 21.1%

The Bureau of Labor Statistics announces it will switch the CPI reference year from 2015 to 2025. A student panics: "Doesn't that change how much inflation we had in 2018?" Is the student right?

A) Yes—measured inflation rates will be completely different

B) No—the index numbers will shift, but the percentage change between any two years stays the

same

C) Yes—rebasing erases all historical data

D) No—because rebasing only affects future years, not past ones

B

If a country decides that 2030 will be its new CPI base year, the CPI value in 2030 will automatically be:

100

Always. By definition, the base year's CPI is set to 100

Smartphone apps have replaced dozens of devices—alarm clocks, cameras, GPS units, calculators. The CPI may not fully capture the benefit consumers gain from this kind of technological change. This is an example of:

A) Substitution bias

B) Commodity bias

C) New-goods bias—products that did not previously exist are missing from the fixed basket

D) Income bias

C

new-goods bias

when entirely new products appear and are not in fixed basket --> CPI misses added consumer value

Beef prices spike 30%, so many families switch to chicken. The CPI, however, continues to track the original amount of beef in the basket. As a result, the CPI:

A) Understates the increase in the cost of living

B) Perfectly tracks the increase

C) Overstates the increase, because real consumers already switched to something cheaper

D) Has no bias in this scenario

C

substitution bias

the inability of the CPI to account for consumers' substitution toward relatively cheaper goods and services

A laptop's price stays at $800 year after year, but each new model is faster and has double the storage. The CPI records no price change. What is the problem?

A) The CPI understates inflation

B) The CPI overstates inflation because the true cost of "computing power" has fallen

C) There is no bias here

D) The CPI should exclude electronics entirely

B

quality bias

getting a better product for the same dollar amount, so rest cost of a unit of computing has dropped --> CPI misses this improvement and reports zero change instead of a decline

what does CPI do to inflation?

overstates it -- true cost of living rises less than CPI suggests

A box of crackers has carried a $3.99 price tag for two years, but the latest box contains 8 ounces instead of last year's 10 ounces. What is the economic reality?

A) The cost of crackers has gone down

B) The price is unchanged so inflation is zero for this item

C) The sticker price is a disguise—less product for the same dollars means each ounce quietly

got more expensive

D) Product quality must have improved

C

shrinkflation

same sticker price, less product inside

David's boss tells him, "Congratulations, you got a 4% raise!" David is pleased—but what one piece of information would instantly tell him whether his standard of living truly improved?

A) The company's stock price

B) How much prices rose over the same period

C) The national debt

D) The country's total exports

B

Aisha earns $30 per hour. Over the year, her pay climbs to $31.50 and the CPI moves from 300 to 315. Has her purchasing power changed?

real wage is unchanged

Real wage before = 30/300 × 100 = 10 Real wage after = 31.50/315 × 100 = 10

In 1978, the federal minimum wage was $2.65. Adjusted for inflation, that is equivalent to about $11.00 in 2022 dollars. The actual 2022 minimum wage was $7.25. What does this tell us?

A) Today's minimum-wage workers enjoy greater purchasing power than in 1978

B) A minimum-wage earner in 1978 could afford more with their paycheck than a minimum-wage

earner can today

C) The nominal minimum wage has decreased over time

D) Inflation has been zero since 1978

B

The U.S. Army orders 500 helicopters from an American manufacturer, and the price per helicopter jumps 12%. Which price index is most directly affected?

A) The CPI, because military spending affects everyone

B) Both indices equally

C) Neither index, because military goods are excluded from all statistics

D) The GDP deflator picks this up because it tracks all domestic output, whereas the CPI only

watches what ordinary households buy—and households do not shop for military helicopters

D

CPI

fixed basket of consumer goods (including imports consumers buy)

GDP deflator

all domestically produced goods (not including imports)

unemployment rate =

(number of unemployed/labor force) x 100

labor force =

employed + unemployed

In Econoland, 180 million people have jobs, 15 million are jobless but actively searching, and 70 million are not in the labor force. What is the unemployment rate?

Labor Force = 180 + 15 = 195 million

Unemployment Rate = 15/195 × 100 = 7.69%

people not in labor force

not working and not looking; ex. retirees, full-time students, etc

The government classifies someone as officially unemployed only if they satisfy which pair of conditions?

A) They lack a job and have given up looking

B) They work fewer hours than they want

C) Two things must both be true: the person is jobless, and the person has been making concrete

efforts to land a position

D) They lack a job regardless of whether they are searching

C

unemployed

not having a job but actively looking

employed

anyone working

The town of Greenfield has the following population breakdown:

Adults working full or part time 250,000

Children under 16 with after-school jobs 4,000

Voluntarily left jobs and now interviewing elsewhere 8,000

Laid off during a slowdown (all actively seeking work) 15,000

Plant shut down—9,000 job-hunting, 3,000 gave up 12,000

Active-duty military personnel 6,000

Retired individuals 20,000

Adults with disabilities (not seeking work) 5,000

Full-time college students (not working) 7,000

Incarcerated individuals 2,000

How many people are unemployed?

8,000 (quit, searching) + 15,000 (laid off, looking) + 9,000 (plant closed, looking) = 32,000

The town of Greenfield has the following population breakdown:

Adults working full or part time 250,000

Children under 16 with after-school jobs 4,000

Voluntarily left jobs and now interviewing elsewhere 8,000

Laid off during a slowdown (all actively seeking work) 15,000

Plant shut down—9,000 job-hunting, 3,000 gave up 12,000

Active-duty military personnel 6,000

Retired individuals 20,000

Adults with disabilities (not seeking work) 5,000

Full-time college students (not working) 7,000

Incarcerated individuals 2,000

What is the unemployment rate?

Labor Force = 250,000 + 32,000 = 282,000

Unemployment Rate = 32,000/282,000 × 100 = 11.35%

The town of Greenfield has the following population breakdown:

Adults working full or part time 250,000

Children under 16 with after-school jobs 4,000

Voluntarily left jobs and now interviewing elsewhere 8,000

Laid off during a slowdown (all actively seeking work) 15,000

Plant shut down—9,000 job-hunting, 3,000 gave up 12,000

Active-duty military personnel 6,000

Retired individuals 20,000

Adults with disabilities (not seeking work) 5,000

Full-time college students (not working) 7,000

Incarcerated individuals 2,000

How many are not in labor force?

3,000 (gave up) + 20,000 (retirees) + 5,000 (disabled) + 7,000 (students) = 35,000

who is not considered at all in labor force, unemployed, etc?

children under 16, military, and prisoners

Carlos just graduated from nursing school and is sending out applications to hospitals. He has had two interviews this week. What type of unemployment is he experiencing?

A) Structural

B) Cyclical

C) Seasonal

D) Frictional

D

frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills; looking for first job or quitting to find something better

An accounting firm adopts AI software that replaces many bookkeepers. Those workers lack the programming skills the firm now demands. What kind of unemployment

is this?

A) Frictional

B) Structural

C) Cyclical

D) Seasonal

B

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available or industry permanently changes; lasts longer than frictional

A theme-park attendant loses her position after visitor numbers plunge during a nationwide economic downturn. This is best classified as:

A) Seasonal unemployment

B) Structural unemployment

C) Frictional unemployment

D) Cyclical unemployment

D

cyclical unemployment

unemployment that occurs due to economic downturn, recession, economy-wide decline, etc

An economics textbook lists three forces that can hold wages above the market-clearing level, generating structural unemployment. Which trio is correct?

A) Import tariffs, sales taxes, and subsidies

B) Efficiency wages, union-negotiated contracts, and minimum wage legislation

C) Monetary policy, fiscal policy, and exchange-rate policy

D) Seasonal demand shifts, technological change, and trade deficits

B

minimum wage laws

legal floor on pay --> surplus of labor --> increase in structural unemployment

unions

negotiate wages above what market would set --> surplus of labor --> increase in structural unemployment

efficiency wages

firms voluntarily pay extra to reduce turnover and boost effort --> surplus of labor --> increase in structural unemployment

When a labor union negotiates a pay rate above the level where supply equals demand, why does unemployment result?

A) Firms go bankrupt immediately

B) At the higher wage, the number of people wanting to work exceeds the number of positions

firms offer

C) Workers refuse to show up at the negotiated wage

D) The government forces layoffs to offset the wage increase

B

Jerome was a warehouse supervisor. After nine months of fruitless job applications, he stopped searching entirely, though he still wants to work. How is Jerome classified?

A) Employed part-time

B) Officially unemployed

C) A discouraged worker—since he stopped searching, he is classified as not in the labor force

despite wanting employment

D) Structurally unemployed

C

Why do economists worry about the existence of discouraged workers?

A) Discouraged workers drive up the official unemployment rate

B) They are counted as employed, inflating output statistics

C) When these workers quit searching, they vanish from the unemployment count, so the pub-

lished rate paints a rosier picture than reality

D) They have no economic impact whatsoever

C

unemployment rate actually drops when people leave labor force

Dr. Patel holds a Ph.D. in chemistry but can only find a position as a part-time lab assistant at half his previous salary. Officially, he is:

A) Unemployed, because he is overqualified

B) Not in the labor force, because his job doesn't use his degree

C) Structurally unemployed

D) Employed—but underemployed, because his skills and training far exceed what the job requires

D

underemployed

working at a job for which one is overqualified, or working part-time when full-time work is desired

Even when the economy is performing well—no recession, businesses are hiring—some unemployment still exists. Economists call this the:

A) Cyclical rate

B) Zero rate

C) Seasonal rate

D) Natural rate of unemployment

D

natural rate of unemployment =

frictional unemployment + seasonal unemployment

When the actual unemployment rate equals the natural rate, we can say:

A) Nobody in the country is without work

B) Cyclical unemployment has fallen to zero—only frictional and structural unemployment remain

C) GDP must be falling

D) Inflation must be zero

B

zero cyclical unemployment

economy is neither in recession nor overheating

Congress passes a law that significantly increases the size and duration of unemployment benefit checks. The most likely labor-market consequence is:

A) Structural unemployment vanishes overnight

B) The average time people spend searching for work increases

C) Wages fall across the board

D) The unemployment rate immediately drops to zero

B

A student argues: "If the government tried hard enough, it could eliminate all unemployment." Why is this wrong?

A) Industries constantly evolve, graduates enter the workforce, and people relocate—so at any

moment a slice of the population is mid-search or retraining

B) Firms are legally required to keep a fixed fraction of their workforce idle

C) All workers prefer leisure to employment

D) The Constitution mandates a minimum unemployment rate

A

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