Principles of Macroeconomics Problem Set 1 Answers

Principles of Macroeconomics 1. Suppose an economy’s production consists only of corn and soybeans. In 2010, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2009, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2009 as the base year, it follows that, for 2010, a. nominal GDP is $50, real GDP is $100, and the GDP deflator is 50. b. nominal GDP is $50, real GDP is $100, and the GDP deflator is 200. c. nominal GDP is $100, real GDP is $50, and the GDP deflator is 50. d. nominal GDP is $100, real GDP is $50, and the GDP deflator is 200. ANSWER: d Table 1 The table below contains data for the country of Togogo. The base year is 1974. Nominal GDP Deflator GDP 1974 $2000 100 1975 $3000 120 1976 $3750 150 1977 $6000 200 2. Refer to Table 1. From 1975 to 1976, a. inflation was 25% and output did not grow. b. inflation was 25% and output grew. Year c. inflation was 50% and output did not grow. d. inflation was 50% and output grew. ANSWER: a 3. In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the a. GDP deflator rises much more than does the consumer price index. b. consumer price index rises much more than does the GDP deflator. c. GDP deflator and the consumer price index rise by about the same amount. d. consumer price index rises slightly more than does the GDP deflator. ANSWER: b 4. If the nominal interest rate is 4.2 percent and the rate of inflation is -0.5 percent, then the real interest rate is a. -8.4 percent. b. -2.1 percent. c. 3.7 percent. d. 4.7 percent. ANSWER: d 5. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 237 for 2015. President Hoover’s 1931 salary was equivalent to a 2015 salary of about a. $4,965. b. $1,169,408. c. $1,057,894. d. $16,080,001. Page 1 of 9 ANSWER: b 6. If nominal GDP is $12 trillion and real GDP is $10 trillion, then the GDP deflator is a. 83.33, and this indicates that the price level has decreased by 16.67 percent since the base year. b. 83.33, and this indicates that the price level has increased by 83.33 percent since the base year. c. 120, and this indicates that the price level has increased by 20 percent since the base year. d. 120, and this indicates that the price level has increased by 120 percent since the base year. ANSWER: c 7. Every unit of good x that is produced in the United States is exported to other countries. An increase in the price of good x shows up a. in the consumer price index and in the GDP deflator. b. in the consumer price index, but not in the GDP deflator. c. in the GDP deflator, but not in the consumer price index. d. in neither the consumer price index nor in the GDP deflator. ANSWER: c 8. A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deflator of 125 in 2010 and 120 in 2009. Between 2009 and 2010, a. real output and the price level both rose. b. real output rose and the price level fell. c. real output fell and the price level rose. d. real output and the price level both fell. ANSWER: a 9. Last year country A had a nominal GDP of $600 billion, a GDP deflator of 150 and a population of 40 million. Country B had a nominal GDP of $720 billion, a GDP deflator of 120 and a population of 50 million. From these numbers which country is likely to have had the higher standard of living? a. Country A because it had the higher nominal GDP per person. b. Country B because it had the higher nominal GDP per person. c. Country A because it had the higher real GDP per person. d. Country B because it had the higher real GDP per person. ANSWER: d 10. A decrease in the price of domestically produced industrial robots will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator. ANSWER: c 11. If the price of Italian shoes imported into the United States increases, then a. both the GDP deflator and the consumer price index will increase. b. neither the GDP deflator nor the consumer price index will increase. c. the GDP deflator will increase, but the consumer price index will not increase. d. the consumer price index will increase, but the GDP deflator will not increase. ANSWER: d Page 2 of 9 12. Suppose the consumer price index was 184 in 2009 and 198.17 in 2010. The nominal interest rate during this period was 5.8 percent. What was the real interest rate during this period? a. 0.4 percent b. 1.2 percent c. –1.9 percent d. –2.6 percent ANSWER: c 13. Which of the following is included in the calculation of GDP? a. The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country. b. The purchase of a new edition of a foreign textbook that was produced in a different nation. c. The purchase of ink and paper supplies by a textbook company for the production of new textbooks. d. The purchase of a used textbook from a friend who took the same class last year. ANSWER: a 14. James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent. How much do the housing services provided by the two houses contribute to GDP? a. $0 b. $10,000 c. $12,000 d. $22,000 ANSWER: d 15. Most goods and services produced at home a. and most goods and services produced illegally are included in GDP. b. are included in GDP while most goods and services produced illegally are excluded from GDP. c. are excluded from GDP while most goods and services produced illegally are included in GDP d. and most goods and services produced illegally are excluded from GDP. ANSWER: d 16. AA Appliances sells refrigerators. In 2015 it added $100,000 to its inventory. $10,000 of this addition was from used refrigerators, and the remaining $90,000 was from their purchases of newly manufactured refrigerators. How much of AA’s inventory is included in 2015 GDP? a. $0 b. $10,000 c. $90,000 d. $100,000 ANSWER: c 17. Which of the following transactions would be included in GDP for 2015? a. In February 2015, Amanda sells a 2009 Hyundai to Isabella. b. In March 2015, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in February 2016. c. In November 2015, Isabella eats onions that she harvested from her backyard garden in October 2015. d. All of the above are correct. ANSWER: b 18. A tire manufacturer produces 400 tires valued at $20 each. Three hundred tires are sold to a tire shop, which then Page 3 of 9 sells them to households for $50 each. The remaining tires are unsold and are added to the tire manufacturer’s inventory. How much is added to GDP? a. $8,000 b. $15,000 c. $17,000 d. $13,000 ANSWER: c 19. In the simple circular-flow diagram, with households and firms, GDP can be computed a. as the income received by households, in the form of wages, rent and profit. b. as the income received by households in the form of wages. c. as the payments made by firms for labor. d. as the profits received by households. ANSWER: a 20. If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP a. decreases. b. increases. c. doesn't change because both legal and illegal production are included in GDP. d. doesn't change because these activities are never included in GDP. ANSWER: b 21. The purchase of rice produced this period is included in GDP if the rice is a. used in a meal a restaurant sells during the same period they buy the rice. b. purchased by a family who uses it to make tuna casserole for its supper. c. purchased by a frozen food company to increase its inventory. d. B and C are correct. ANSWER: d 22. A painter pays $500 for paint he uses to repaint a house. He then presents a bill for $1200 that covers his time and expenses to the homeowner. How much do these transactions add to GDP? a. $500 b. $700 c. $1200 d. $1700 ANSWER: c 23. Jennifer lives in a home that was newly constructed in 2011 for which she paid $240,000. In 2014 she sold the house for $260,000. Which of the following statements is correct regarding the sale of the house? a. The 2014 sale increased 2014 GDP by $260,000 and had no effect on 2011 GDP. b. The 2014 sale increased 2014 GDP by $20,000 and had no effect on 2011 GDP. c. The 2014 sale increased 2014 GDP by $260,000; furthermore, the 2014 sale caused 2011 GDP to be revised upward by $20,000. d. The 2014 sale affected neither 2014 GDP nor 2011 GDP. ANSWER: d Page 4 of 9 24. Suppose buyers of computers and printers regard the two goods as complements. Then an increase in the price of computers will cause a(n) a. decrease in the demand for printers and a decrease in the quantity supplied of printers. b. decrease in the supply of printers and a decrease in the quantity demanded of printers. c. decrease in the equilibrium price of printers and an increase in the equilibrium quantity of printers. d. increase in the equilibrium price of printers and a decrease in the equilibrium quantity of printers. ANSWER: a 25. If macaroni and cheese is an inferior good, then an increase in a. the price will cause the demand curve for macaroni and cheese to shift to the left. b. the price will cause the demand curve for macaroni and cheese to shift to the right. c. a consumer’s income will cause the demand curve for macaroni and cheese to shift to the left. d. a consumer’s income will cause the demand curve for macaroni and cheese to shift to the right. ANSWER: c Figure 1 26. Refer to Figure 1. Which of the following would cause the supply curve to shift from Supply A to Supply C in the market for beach towels? a. an increase in the price of beach towels b. an expectation by firms that the price of beach towels will increase in the very near future c. a decrease in the price of cotton d. a decrease in the number of firms selling beach towels ANSWER: c Table 2 A country club usually only allows members to purchase tickets for its celebrity golf tournament, but the club is considering allowing non-members to purchase tickets this year. The demand and supply schedules are as follows: Price $10 $15 $20 $25 $30 Quantity Demanded by Members 1000 800 600 400 200 Quantity Demanded by Non-members 500 400 300 200 100 Quantity Supplied 600 600 600 600 600 27. Refer to Table 2. If only members are allowed to purchase tickets to this year's celebrity golf tournament, then what will be the equilibrium price? a. $10 Page 5 of 9 b. $15 c. $20 d. $25 ANSWER:c Figure 2 28. Refer to Figure 2. The figure shows which of the following? a. an increase in demand and an increase in quantity supplied b. an increase in demand and an increase in supply c. an increase in quantity demanded and an increase in quantity supplied d. an increase in quantity demanded and an increase in supply ANSWER:a Table 3 The demand schedule below pertains to sandwiches demanded per week. Harry’s Darby’s Jake’s Price Quantity Quantity Quantity Demanded Demanded Demanded $3 3 4 3 $5 1 2 x 29. Refer to Table 3. Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also suppose x = 2. Then a. the slope of Jake’s demand curve is -1/2, and the slope of the market demand curve is -5/2. b. the slope of Jake’s demand curve is -1/2, and the slope of the market demand curve is -2/5. c. the slope of Jake’s demand curve is -2, and the slope of the market demand curve is -5/2. d. the slope of Jake’s demand curve is -2, and the slope of the market demand curve is -2/5. ANSWER:d 30. Which of the following equations represents GDP for a closed economy? a. Y = C + I + G + T b. S = I - G c. I = Y - C + G d. Y = C + I + G ANSWER: d Page 6 of 9 31. Suppose the economy is closed and consumption is 8 million, taxes are 2 million, and government purchases are 1.75 million. If national saving amounts to 1.25 million, then what is GDP? a. 9 million. b. 9.5 million. c. 13 million. d. 11 million. ANSWER: d Figure 3. 32. Refer to Figure 3. Which of the following pairs correctly identify W and Y? a. markets for factors of production and markets for goods and services b. firms and households c. expenditures and income d. consumption and investment ANSWER:b 33. For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2.5 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving? a. $1.5 trillion and $2.5 trillion, respectively b. $2.5 trillion and $1.5 trillion, respectively c. $2.5 trillion and $2.5 trillion, respectively d. $1.5 trillion and $1.5 trillion, respectively ANSWER: a 34. For an imaginary closed economy, T = $5,000; S = $11,000; C = $48,000; and the government is running a budget surplus of $1,000. Then a. private saving = $10,000 and GDP = $55,000. b. private saving = $10,000 and GDP = $63,000. c. private saving = $12,000 and GDP = $67,000. d. private saving = $12,000 and GDP = $69,000. ANSWER: b 35. Which of the following events could explain an increase in interest rates together with a decrease in investment? a. The government budget went from surplus to deficit. b. The government instituted an investment tax credit. c. The government reduced the tax rate on savings. Page 7 of 9 d. None of the above is correct. ANSWER: a 36. Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward. ANSWER: b 37. In 2016 based on people ages 15-74 the Swedish adult non-institutionalized population was about 7.3 million, the labor force was 5.2 million, and the number of people employed was 4.8 million. According to these numbers, the Swedish labor-force participation rate and unemployment rate were about a. 71.2% and 7.7% b. 71.2% and 5.5% c. 65.8% and 7.7% d. 65.8% and 5.5% ANSWER: a 38. Suppose that some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed? a. 1.5 million b. 28.5 million c. 30 million d. 47.5 million ANSWER: b 39. Suppose that an anti-smoking campaign in Moscow, Russia, is successful so that Muscovites smoke less and chew gum more. Tobacco companies lay off workers, while chewing gum manufacturers employ more workers. This is an example of a. structural unemployment created by efficiency wages. b. structural unemployment created by sectoral shifts. c. frictional unemployment created by efficiency wages. d. frictional unemployment created by sectoral shifts. ANSWER: d 40. A firm may pay efficiency wages in an attempt to a. entice workers to work the night shift rather than the day shift. b. improve productivity by reducing turnover. c. reduce costs by attracting the least-skilled workers to apply for job vacancies. d. All of the above are correct. ANSWER: b 41. An economy’s natural rate of unemployment is the a. economy’s long-run target level of unemployment. b. amount of unemployment that the economy normally experiences. c. lowest rate of unemployment the economy can achieve. Page 8 of 9 d. All of the above are correct. ANSWER: b 42. Sirius has just finished high school and started looking for his first job, but has not yet found one. Other things the same, the unemployment rate a. and the labor-force participation rate both increase. b. increases, and the labor-force participation rate is unaffected. c. is unaffected, and the labor-force participation rate increases. d. and the labor-force participation rate are both unaffected. ANSWER: a 43. If the minimum wage is currently above the equilibrium wage, then a decrease in the minimum wage a. increases both the quantity demanded and the quantity supplied of labor. b. decreases both the quantity demanded and the quantity supplied of labor. c. increases the quantity of labor demanded but decreases the quantity of labor supplied. d. decreases the quantity of labor demanded but increases the quantity of labor supplied. ANSWER: c Table 4 Below is data about the labor market in the city of Productionville. Wage Quantity Demanded Quantity Supplied $8 6,000 16,000 $7 9,000 14,000 $6 12,000 12,000 $5 15,000 10,000 $4 18,000 8,000 44. Refer to Table 4. If the local government imposed a minimum wage of $5 in Productionville, how many people would be unemployed? a. 0 b. 2,000 c. 3,000 d. 5,000 ANSWER: a 45. The introduction of a union into an industry a. raises wages and employment in that industry. b. lowers wages and employment in that industry. c. lowers wages and raises employment in that industry. d. raises wages and lowers employment in that industry. ANSWER: d Page 9 of 9