Question 1: Macroeconomics is
a. the study of market regulation.
b. the study of economy-wide phenomena.
c. the study of how households and firms make decisions and how they
interact.
d. the study of money and financial markets.
Question 2: Macroeconomics includes the study of topics such as:
a. national output, the national unemployment rate, the rate of inflation,
and the trade deficit.
b. the price of Novell stock, the wage rate of steel workers, and antitrust
laws.
c. the expected effect of bad weather in Florida on the price of orange
juice.
d. how prices coordinate the decisions of millions of buyers and sellers in
the market.
Question 3: The goal of macroeconomics is
a. to explain the economic changes that affect a particular household,
firm, or market.
b. to explain the economic changes that affect many households, firms,
and markets at once.
c. to devise policies to deal with market failures such as monopoly,
externalities, common resources, and public goods.
d. all of the above.
Question 4: In a simple circular-flow diagram, total income and total
expenditure in an economy
a. are seldom equal because of the dynamic changes which occur in an
economy.
b. are equal only when all goods and services produced are sold.
c. are always equal because every transaction has both a buyer and a
seller.
d. are always equal because of accounting rules.
Question 5: Gross Domestic Product is defined as
a. the market value of all final goods and services produced within a
country in a given period of time.
b. the market value of all final goods and services produced by a country's
citizens in a given period of time.
c. the market value of all goods and services produced within a country in
a given period of time.
d. the market value of all goods and services produced by a country's
citizens in a given period of time.
Question 6: Market prices are used in adding together different kinds of
products into a single, summary measure of economic activity because
a. market prices rarely change, therefore, the measure is easy to update
each year.
b. market prices are set by government to reflect the importance of each
product in the economy.
c. market prices measure what people are willing to pay for different
goods; hence, they reflect the value of those goods.
d. None of the above is correct. Market prices are not used in summary
measures of economic activity.
Question 7: George decides to cut his own hair rather than paying a barber to
cut it, as had been his custom. He buys scissors and comb and proceeds to
cut his own hair. As a result of his purchase and haircut
a. GDP stays the same, because the same service was performed by
George as would have been performed by the barber.
b. GDP is reduced, because George does not cut hair as well as the barber
cuts hair.
c. GDP is reduced, because George’s haircut is no longer a market
transaction.
d. We cannot tell whether GDP increases, decreases, or remains the same.
Question 8: The four components of GDP are
a. consumption, money supply, government purchases, and exports.
b. consumption, investment, transfer payments, and imports.
c. consumption, investment, government purchases, and foreign exchange.
d. consumption, investment, government purchases, and net exports
Question 9: In macroeconomics, investment is
a. spending on stocks, bonds, and other financial assets.
b. spending on real estate and financial assets.
c. spending on capital equipment, inventories, and structures, including
new housing.
d. spending on capital equipment, inventories, and structures, excluding
household purchases of new housing.
Question 10: The Arizona state highway department spends $10 million in 2000
to install new cattle guards in its roads.
a. 2000 GDP is unaffected because only federal government purchases are
included in GDP.
b. 2000 GDP increases by $10 million because state government
purchases are included in GDP.
c. 2000 GDP increases by less than $10 million because the value of the
cattle guards will be spread over the expected useful life of the guards.
d. 2000 GDP increases by more than $10 million because of the reduction
in accident rates.
Question 11: If a U.S. household buys a $50 wool sweater from Canada,
a. U.S. consumption increases by $50, U.S. imports increase by $50, and
U.S. GDP increases by $50.
b. U.S. consumption increases by $50, U.S. imports increase by $50, but
U.S. GDP is unaffected.
c. U.S. consumption increases by $50, U.S. imports are unaffected, and
U.S. GDP is unaffected.
d. U.S. consumption increases by $50, U.S. exports increase by $50, and
U.S. GDP increases by $50.
Question 12: Real GDP
a. evaluates current production at the prices that prevailed in some
specific year in the past.
b. evaluates current production at current prices.
c. is not a valid measure of the economy’s performance, since prices
actually change from year to year.
d. is a measure of the value of goods only, hence, it excludes the value of
services.
Question 13: Suppose GDP consists of wheat and rice, and in 2001, 20 bushels
of wheat are sold at $4 per bushel, and 10 bushels of rice are sold at $2 per
bushel. If the price of wheat was $1 per bushel and the price of rice was $2 per
bushel in 2000, the base year,
a. nominal 2001 GDP is $100, real 2001 GDP is $40, and the GDP
deflator is 40.
b. nominal 2001 GDP is $40, real 2001 GDP is $100, and the GDP
deflator is 250.
c. nominal 2001 GDP is $100, real 2001 GDP is $40, and the GDP
deflator is 250.
Nominal GDP: 20*4 + 10*2= 100
Real GDP: 20*1 + 10*2 = 40
GDP deflator: (100/40) * 100= 250
d. nominal 2001 GDP is $40, real 2001 GDP is $100, and the GDP
deflator is 40.
Question 14: Chris lives in Utah, where gambling is illegal. Chris becomes a
professional gambler, going to work each week in Idaho, where gambling is
legal. In 2001, he earns $100,000 from his profession. What will be the
effect of his earnings on GDP?
a. None of his earnings will be included in GDP because gambling is illegal in
his home state.
b. Only the part of his earnings spent in Idaho will be included in GDP.
c. GDP will increase by $100,000 because the income was earned legally.
d. GDP will increase by a fraction of $100,000, equal to the fraction of the time
Chris spends in Idaho.
Question 15: In Vietnam, GDP consists of cranberries and maple syrup. In
2000, 50 units of cranberries are sold at $10 per unit, and 100 units of
maple syrup are sold at $5 per unit. If the price of cranberries was $5 per
unit and the price of maple syrup was $7.50 per unit in 1999, the base year,
a. nominal 2000 GDP is $1,000, real 2000 GDP is $1,000, and the GDP
deflator is 100.
b. nominal 2000 GDP is $1,000, real 2000 GDP is $1,250, and the GDP
deflator is 83.3.
c. nominal 2000 GDP is $1,000, real 2000 GDP is $1,000, and the GDP
deflator is 1.
d. nominal 2000 GDP is $1,000, real 2000 GDP is $833, and the GDP
deflator is 125.
Question 16: Babe Ruth, the famous baseball player, earned $80,000 in 1931.
Today, the best baseball players can earn 100 times as much as did Babe Ruth
in 1931. However, prices have also risen since 1931. We can conclude that
a.
the best baseball players today are about 100 times better off than Babe
Ruth was in 1931.
b.
because prices have also risen, the standard of living of baseball stars
hasn’t changed since 1931.
c.
We cannot make judgements about changes in the standard of living
based on changes in prices and changes in incomes.
d.
We cannot determine whether baseball stars today enjoy a higher
standard of living than Babe Ruth did in 1931 without additional information
regarding increases in prices since 1931.
Question 17: The term inflation is used to describe a situation in which
a. incomes in the economy are increasing.
b. stock market prices are rising.
c. the economy is growing rapidly.
d. the overall level of prices in the economy is increasing.
Question 18: The CPI is a measure of
a. the overall cost of goods and services bought by a typical consumer.
b. the overall cost of inputs purchased by a typical producer.
c. the overall cost of goods and services produced in the economy.
d. the overall cost of stocks on the New York Stock Exchange.
Question 19: The steps involved in calculating the consumer price index
include, in order:
a. Choose a base year; fix the basket, find the prices, compute the basket’s
cost, and compute the index, compute the inflation rate
b. Choose a base year, find the prices, fix the basket, compute the basket’s
cost, compute the index and the inflation rate
c. Fix the basket, find the prices, compute the inflation rate, choose a base
year and compute the index
d. Choose a base year, fix the basket, compute the inflation rate, compute
the basket’s cost and compute the index
Question 20: For any given year, the CPI is
a. the price of the basket of goods and services in the base year divided by
the price of the basket in the given year, then divided by 100.
b. higher than the previous year.
c. the price of the basket of goods and services in the base year divided by
the price of the basket in the given year, then multiplied by 100.
d. the price of the basket of goods and services in the given year divided
by the price of the basket in the base year, then multiplied by 100.
Question 21: Arturo buys a hand calculator in 1970 for $200. By 2000, the same
calculator sells for $1, and Arturo buys several. What problem in the
construction of the CPI does this situation best illustrate?
a. introduction of new goods
b. substitution bias
c. unmeasured quality change
d. all of the above
e. none of the above
Question 22: Which of the following statements best represents economists'
beliefs about the bias in the CPI as a measure of the cost of living?
a. Economists agree that the bias in the CPI is a very serious problem.
b. Economists agree that the bias in the CPI is not a serious problem.
c. Economists agree on the severity of the CPI bias, but there is still
debate on what to do about it.
d. There is still debate among economists on the severity of the CPI bias
and what to do about it.
Question 23: An important difference between the GDP deflator and the
consumer price index is that
a. the GDP deflator reflects the prices of goods and services bought by
producers, whereas the consumer price index reflects the prices of
goods and services bought by consumers.
b. the GDP deflator reflects the prices of all goods and services produced
domestically, whereas the consumer price index reflects the prices of
goods and services bought by consumers.
c. the GDP deflator reflects the prices of all goods and services produced
by a nation's resources, whereas the consumer price index reflects the
prices of goods and services bought by consumers.
d. the GDP deflator reflects the prices of goods and services bought by
producers and consumers, whereas the consumer price index reflects
the prices of goods and services bought by consumers.
Question 24: Which is the most accurate statement about the GDP deflator and
the consumer price index?
a. Both the GDP deflator and the consumer price index compare the price
of a fixed basket of goods and services to the price of the basket in the
base year.
b. Both the GDP deflator and the consumer price index compare the price
of currently produced goods and services to the price of the same goods
and services in the base year.
c. The GDP deflator compares the price of a fixed basket of goods and
services to the price of the basket in the base year, but the consumer
price index compares the price of currently produced goods and
services to the price of the same goods and services in the base year.
d. The consumer price index compares the price of a fixed basket of goods
and services to the price of the basket in the base year, but the GDP
deflator compares the price of currently produced goods and services to
the price of the same goods and services in the base year.
Question 25: What is the purpose of measuring the overall level of prices in the
economy?
a. to allow the measurement of GDP
b. to allow comparison between dollar figures from different points in
time
c. to allow government officials to determine whether the value of the
dollar has increased or decreased
d. to allow consumers to know what kinds of prices to expect in the future
Question 26: Wally Plowman earns $3,000 from his farm operation in 1945. In
2005, Wally’s grandson Vern earns $30,000 from the same farm. The price
index for 1945 is 10, and the price index for 2005 is 150.
What is Wally’s income in 1945 converted to 2005 dollars?
a. $3,000
b. $30,000
c. $45,000
d. $130,000
Amount of T year 3000 * (150/10) = 45.000
Question 27: If the nominal interest rate is 8% and rate of inflation is 3%, the
real interest rate is
a. 11%.
b. 24%.
c. 5%.
d. 3.75%.
Question 28: Which is the most accurate statement about the relationship
between inflation and interest rates?
a. There is no relationship between inflation and interest rates.
b. The interest rate is determined by the rate of inflation.
c. In order to fully understand inflation, we need to know how to correct for
the effects of interest rates.
d. In order to fully understand interest rates, we need to know how to correct
for the effects of inflation.
ESSAYS AND PROBLEMS:
CHAP 10 PROB 4 + 5
Problem 4:
a.
Calculating nominal GDP:
2013: ($1 × 100) + ($2 × 50) = $200
2014: ($1 × 200) + ($2 × 100) = $400
2015: ($2 × 200) + ($4 × 100) = $800
Calculating real GDP (base year 2013):
2013: ($1× 100) + ($2 × 50) = $200
2014: ($1 × 200) + ($2× 100) = $400
2015: ($1 × 200) + ($2 × 100) = $400
Calculating the GDP deflator:
2013: ($200/$200) × 100 = 100
2014: ($400/$400) × 100 = 100
2015: ($800/$400) × 100 = 200
b.
Percentage change in nominal GDP in 2014 = [($400 – $200)/$200] × 100 =
100%.
Percentage change in nominal GDP in 2015 = [($800 – $400)/$400] × 100 =
100%.
Percentage change in real GDP in 2014 = [($400 – $200)/$200] × 100 = 100%.
Percentage change in real GDP in 2015 = [($400 – $400)/$400] × 100 = 0%.
Percentage change in the GDP deflator in 2014 = [(100 – 100)/100] × 100 =
0%.
Percentage change in the GDP deflator in 2015 = [(200 – 100)/100] × 100 =
100%.
Problem 5:
In year 1: Q = 3 bars and P = $4
In year 2: Q = 4 bars and P = $5
In year 3: Q = 5 bars and P = $6
a.
Nominal GDP of year 1: Price (year 1) x Quantity (year 1) = $4 x 3 bars = $12
Nominal GDP of year 2: Price (year 2) x Quantity (year 2) = $5 x 4 bars = $20
Nominal GDP of year 3: Price (year 3) x Quantity (year 3) = $6 x 5 bars = $30
b.
Real GDP of year 1: Price (year 1) x Quantity (year 1) = $4 x 3 bars = $12
Real GDP of year 2: Price (year 1) x Quantity (year 2) = $4 x 4 bars = $16
Real GDP of year 3: Price (year 1) x Quantity (year 3) = $4 x 5 bars = $20
c.
GDP deflator of year 1: Nominal GDP (year 1) / Real (year 1) x 100 = $12/$12
x 100 = 100
GDP deflator of year 1: Nominal GDP (year 2) / Real (year 2) x 100 = $20/$16
x 100 = 125
GDP deflator of year 1: Nominal GDP (year 3) / Real (year 3) x 100 = $30/$20
x 100 = 150
d.
The growth rate of GDP from year 2 to year 3 can be estimated as:
Growth rate = (Real GDP (year 3) - Real GDP (year 2) / Real GDP (year 2)) x
100 = (20-16)/16 x 100 = 25%
e.
Inflation rate = (GDP deflator (year 3) - GDP deflator (year 2) / GDP deflator
(year 2)) x 100
Inflation rate = (150-125/125) x 100
Inflation rate = 20%
CHAP 11 PROB 3 + 7
Problem 3:
a.
The percentage change in the price of tennis balls is ($2 – $2)/$2 × 100 = 0%.
The percentage change in the price of golf balls is ($6 – $4)/$4 × 100 = 50%.
The percentage change in the price of Gatorade is ($2 – $1)/$1 × 100 = 100%.
b.
The cost of the market basket in 2014 is (100 x $2) + (100 x $4) + (200 x $1) = $800.
The cost of the market basket in 2015 is (100 x $2) + (100 x $6) + (200 x $2) = $1,200.
Using 2014 as the base year, we can compute the CPI in each year:
2014 = ($800/$800) x 100 = 100
2015 = ($1,200/$800) x 100 = 150
We can use the CPI values to compute the percentage change in the overall price level: (150100)/100 x 100% = 50%
Problem 7:
Price
Wages
1970
0.15
3.36
2011
2
23.09
a. (($2.00 – $0.15)/$0.15) × 100 = 1,233%.
b. ($23.09 – $3.36)/$3.36 × 100 = 587%.
c. In 1970: $0.15/ ($3.36/60) = 2.7 minutes.
In 2011: $2.00/ ($23.09/60) = 5.2 minutes.
d. Workers' purchasing power in terms of newspapers fell.