ECON 303 Exam 1

Conceptual questions from homeworks form chapters 1-4

A graph of the U.S. unemployment rate over the twentieth century shows:

rates of unemployment always greater than zero with substantial variations from year to year.

A severe recession is called a(n):

depression.

All of the following are types of macroeconomics data except the:

price of a computer.

All of the following except _______ are important macroeconomic variables.

the marginal rate of substitution

Compared with real GDP during a recession, real GDP during a depression:

decreases more severely.

Deflation occurs when:

prices fall.

Endogenous variables are:

determined within the model.

In a simple model of the supply and demand for pizza, the endogenous variables are:

the price of pizza and the quantity of pizza sold.

In a simple model of the supply and demand for pizza, when buyers' income increases, the price of pizza ______ and the quantity purchased ______.

increases; increases

In a simple model of the supply and demand for pizza, when the price of cheese increases, the price of pizza ______ and the quantity purchased ______.

increases; decreases

Macroeconomic models are used to explain how ______ variables influence ______ variables.

exogenous; endogenous

Macroeconomic models:

make different assumptions to explain different aspects of the macroeconomy.

Macroeconomics is the study of the:

economy as a whole.

Macroeconomists are like scientists in that they both:

collect data, develop hypotheses, and analyze the results.

The assumption of flexible prices is a more plausible assumption when applied to price changes that occur:

in the long run.

The inflation rate is a measure of how fast:

the general level of prices in the economy is rising.

The unemployment rate:

has never been zero in the United States.

When studying the short-run behavior of the economy, an assumption of ______ is more plausible, whereas when studying the long-run equilibrium behavior of an economy, an assumption of ______ is more plausible.

sticky prices; flexible prices

Which of the following is the best example of a sticky price?

the price of a soda in a vending machine

Which of the following statements about economic models is true?

Economists use different models to address different economic phenomena.

An increase in the price of goods bought by firms and the government will show up in:

the GDP deflator but not in the CPI.

An increase in the price of imported goods will show up in:

the CPI but not in the GDP deflator.

Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, GDP increases by:

$2.

Assume that a tire company sells four tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:

$20,000.

GDP is all of the following except:

the total expenditure of everyone in the economy.

GNP equals GDP ______ income earned domestically by foreigners ______ income that nationals earn abroad.

minus; plus

If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately ______ percent.

4

In the national income accounts, all of the following are classified as government purchases except:

payments made to Social Security recipients.

In the national income accounts, government purchases are goods and services purchased by:

the federal, state, and local governments.

In the national income accounts, the purchases of durables, nondurables, and services by households are classified as:

consumption.

Prices of items included in the CPI are:

weighted according to the quantity of the item purchased by the typical household.

Real GDP means the value of goods and services is measured in ______ prices.

constant

The CPI is determined by computing:

the price of a fixed basket of goods and services, relative to the price of the same basket in a base year.

The amount of capital in an economy is a(n) ______, and the amount of investment is a(n) ______.

stock; flow

The national income accounts identity for an open economy is:

Y = C + I + G + NX.

To avoid double counting in the computation of GDP, GDP includes only the value of ______ goods.

final

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

decrease; increase

Which of the following is a stock variable?

wealth

An economy's factors of production and its production function determine the economy's:

output of goods and services.

An increase in the supply of capital will:

decrease the real rental price of capital.

If an increase of an equal percentage in all factors of production increases output of the same percentage, then a production function has the property called:

constant returns to scale.

If an increasing proportion of the adult population is retired, then the labor-force participation rate:

will decrease.

If bread is produced using a constant returns to scale production function, then if the:

amounts of equipment and workers are both doubled, twice as much bread will be produced.

If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately ______ percent.

2

If the number of employed increases while the number of unemployed does not change, the unemployment rate:

will decrease.

In the circular flow diagram, firms receive revenue from the _____ market, which is used to purchase inputs in the _____ market.

goods; factor

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

factors of production and production function.

The assumption that the factor's supply is fixed will imply that the factor's

supply curve is vertical.

The marginal product of labor is:

additional output produced when one additional unit of labor is added.

The price received by each factor of production is determined by:

demand and supply of factors.

The real rental price of capital is the price per unit of capital measured in:

units of output.

The real wage is the return to labor measured in:

units of output.

The two most important factors of production are:

capital and labor.

Unlike the real world, the classical model with fixed output assumes that:

capital and labor are fully utilized.

Which of the following is a flow variable?

income

A trade in a barter economy requires:

a double coincidence of wants.

According to the model developed in Chapter 3, when government spending increases but taxes stay the same, interest rates:

increase.

All of the following are considered major functions of money except as a:

way to display wealth.

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will:

lower investment and raise the interest rate.

Crowding out occurs when an increase in government spending ______ the interest rate and investment ______.

increases; decreases

In the classical model with fixed income, a reduction in the government budget deficit will lead to a:

lower real interest rate.

In the classical model with fixed income, an increase in the real interest rate could be the result of:

an increase in government spending.

In the classical model with fixed income, if households want to save more than firms want to invest, then:

the interest rate falls.

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

increase.

In the classical model with fixed income, if the interest rate is too high, then investment is too ______, and the demand for output ______ the supply.

low; falls short of

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving ______ and private saving ______.

decreases; increases

People use money as a store of value when they:

hold money to transfer purchasing power into the future.

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

unit of account.

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a ______ interest rate and ______ in the quantity of investment.

higher; an increase

When there is a fixed supply of loanable funds, an increase in investment demand results in:

a higher interest rate.

GDP deflator equation

100 x (nominal GDP/real GDP)

inflation equation

[(GDP deflator of comparison year - GDP deflator of base year)/GDP deflator of base year] x 100

CPI equation

100 x (cost of basket that month/cost of basket in base period)

labor force equation

employed - unemployed

unemployment rate

(unemployed/labor force) x 100

labor force participation rate (LFPR)

(labor force/adult population) x 100

public saving equation

taxes (T) - government expenditure (G)

private saving equation

output (Y) - taxes (T) - consumption (C)

national saving equation

public saving + private saving

When determining the rental rate of capital, Marginal Product of Capital (MPK) is equal to

nominal interest rate ( r )/price of output (P)

When determining the rental rate of capital, Marginal Product of Labor (MPL) is equal to

nominal wage (w)/price of output (P)

Which of these are money?

currency & demand deposits

reserve ratio (rr)

resources ( r )/ deposits (d)

leverage ratio

assets/capital

monetary base (B)

C + R

currency-deposit ratio (cr)

currency ( c )/deposit (d)

money multiplier (m)

(cr + 1)/(cr + rr)

money supply (M)

m x B or C + D