Macroeconomic  Principles (Econ 2305)

Quiz 1

Name : ______________________     SSN : _________________

1.        Comparative advantage is based on

           a.   capital costs.

           b.   labor costs.

           c.    dollar price.

           d.   opportunity costs.

ANSWER: d.         opportunity costs.

2.        According to the table, the opportunity cost of 1 pound of meat for the farmer is

           a.   1/4 hour of labor.

           b.   4 hours of labor.

           c.    4 pounds of potatoes.

           d.   1/4 pound of potatoes.

ANSWER: c.          4 pounds of potatoes.

3.        According to the table, the Rancher has an absolute advantage in

           a.   both goods, and the Farmer has a comparative advantage in meat.

           b.   meat, and the Farmer has a comparative advantage in potatoes.

           c.    meat, and the Farmer has a comparative advantage in neither good.

           d.   both goods, and the Farmer has a comparative advantage in potatoes.

ANSWER: b.         meat, and the Farmer has a comparative advantage in potatoes.

4.        A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. This move

           a.   necessarily raises GDP.

           b.   necessarily decreases GDP.

           c.    doesn’t change GDP because gambling is never included in GDP.

           d.   doesn’t change GDP because in either case his income is included.

ANSWER: a.          necessarily raises GDP.

5.        To compute GDP we

           a.   simply sum the number of final goods and services.

           b.   sum the cost of producing final goods and services.

           c.    use weights determined by a survey regarding how much people value different sorts of goods and services to compute GDP as a weighted average.

           d.   sum the market values of final goods and services.

ANSWER: d.         sum the market values of final goods and services.

6.        Which of the following statements about nominal GDP and real GDP is most accurate?

           a.   Nominal GDP is a better gauge of economic well-being than is real GDP.

           b.   Real GDP is a better gauge of economic well-being than is nominal GDP.

           c.    Real GDP and nominal GDP are equally good measures of economic well-being.

           d.   Whether real GDP or nominal GDP is a better measure of economic well-being depends on what sort of goods are produced.

ANSWER: b.         Real GDP is a better gauge of economic well-being than is nominal GDP.

7.        Suppose that the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans and that the base year is 2000. What is the consumer price index for 2001?

           a.   100

           b.   120

           c.    200

           d.   240

ANSWER: b.         120

8.        What was the inflation rate in 2001?

           a.   20 percent

           b.   16.7 percent

           c.    10 percent

           d.   8 percent

ANSWER: a.          20 percent

9.        The substitution bias in the consumer price index refers to the

           a.   substitution of new goods for old goods in the purchases of consumers.

           b.   substitution of quality for quantity in consumer purchases over time.

           c.    fact that consumers substitute toward goods that have become relatively less expensive.

           d.   substitution of new prices for old prices in the basket of goods from one year to the next.

ANSWER: c.          fact that consumers substitute toward goods that have become relatively less expensive.

10.      Productivity

           a.   is nearly the same across countries and so provides no help explaining differences across countries in the standard of living.

           b.   explains very little of the differences across countries in the standard of living.

           c.    explains some, but not most of the differences across countries in the standard of living.

           d.   explains most of the differences across countries in the standard of living.

ANSWER: d.         explains most of the differences across countries in the standard of living.

11.      Which of the following would not be considered physical capital?

           a.   a new factory building

           b.   a computer used to help Mercury Delivery Service keep track of their orders

           c.    on-the-job training

           d.   a desk used in an accountant’s office

ANSWER: c.          on-the-job training

12.      Other things equal, relatively poor countries tend to grow

           a.   slower than relatively rich countries; this is called the poverty trap.

           b.   slower than relatively rich countries; this is called the Malthus effect.

           c.    faster than relatively rich countries; this is called the catch-up effect.

           d.   faster than relatively rich countries; this is called the constant-returns-to-scale effect.

ANSWER: c.          faster than relatively rich countries; this is called the catch-up effect.

13.      According to the graph, if Paul divides his time equally between corn and wheat, he will be able to produce

           a.   2 bushels of wheat and 2 bushels of corn.

           b.   3 bushels of wheat and 3 bushels of corn.

           c.    4 bushels of wheat and 5 bushels of corn.

           d.   4 bushels of wheat and 6 bushels of corn.

ANSWER: c.          4 bushels of wheat and 5 bushels of corn.

14.      According to the graph, the opportunity cost of 1 bushel of wheat for Cliff is

           a.   1/3 bushel of corn.

b.  2/3 bushel of corn.

           c.    1 bushel of corn.

           d.   3/2 bushels of corn.

ANSWER: b.     2/3 bushel of corn.

15.      Trade is based on

           a.   absolute advantage.

           b.   comparative advantage.

           c.    production costs.

           d.   relative dollar prices.

ANSWER: b.     comparative advantage.

16.      In a simple circular-flow diagram, total income and total expenditures in an economy are

           a.   equal because firms are ultimately owned by households.

           b.   equal only if there is no saving.

           c.    equal because every transaction has a buyer and a seller.

           d.   never equal because some people’s income is not for production.

ANSWER: c.     equal because every transaction has a buyer and a seller.

17.      Which of the following is the correct definition of GDP?

           a.   the market value of all goods produced within a country

           b.   the market value of all final goods and services produced by the citizens of a country

           c.    the market value of all final goods and services produced within a country

           d.   None of the above are correct.

ANSWER: c.     the market value of all final goods and services produced within a country

18.      Which of the following is correct?

           a.   The value of all intermediate goods and final goods are included in GDP.

           b.   The value of intermediate goods are included in GDP only if they were produced in the previous year.

           c.    The value of intermediate goods are included in GDP only if they are purchased by firms rather than households.

           d.   The value of intermediate goods are not included in GDP.

ANSWER: d.     The value of intermediate goods are not included in GDP.

19.      In 2008, OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problem in the construction of the CPI does this situation represent?

           a.   substitution bias and introduction of new goods

           b.   introduction of new goods and unmeasured quality change

           c.    unmeasured quality change and new goods.

           d.   income bias and substitution bias

ANSWER: a.     substitution bias and introduction of new goods

20.      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 final goods and services produced domestically, whereas the consumer price index reflects the prices of some goods and services bought by consumers.

           c.    the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of final goods and services bought by consumers.

           d.   the GDP deflator reflects the prices of all goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of final goods and services bought by consumers.

ANSWER: b.     the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of some goods and services bought by consumers.

21.      Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rate?

           a.   The real interest rate is the nominal interest rate times the rate of inflation.

           b.   The real interest rate is the nominal interest rate minus the rate of inflation.

           c.    The real interest rate is the nominal interest rate plus the rate of inflation.

           d.   The real interest rate is the nominal interest rate divided by the rate of inflation.

ANSWER: b.     The real interest rate is the nominal interest rate minus the rate of inflation.

22.      Gary Becker has proposed programs like Mexico’s Progressa to reduce child labor and increase educational levels.

           a.   If successful, these programs will raise productivity by increasing human capital.

           b.   In Mexico these programs have decreased differences in the level of education obtained by girls and boys.

           c.    Such programs might be funded by reducing money spent on universities and education of the elite.

           d.   All of the above are correct.

ANSWER: d.     All of the above are correct.

23.      The President of a developing country proposes that his country needs to help domestic firms by imposing trade restrictions.

           a.   These are outward-oriented policies and most economists believe they would have beneficial effects on growth.

           b.   These are outward-oriented policies and most economists believe they would have adverse effects on growth.

           c.    These are inward-oriented policies and most economists believe they would have beneficial effects on growth.

           d.   These are inward-oriented policies and most economists believe they would have adverse effects on growth.

ANSWER: d.     These are inward oriented policies and most economists believe they would have adverse effects on growth.

24.      Which of the following is correct?

           a.   Kremer argued that with greater population, society would generate more ideas so that growth of real GDP per person could continue. Malthus argued that increasing population would outstrip agricultural production.

           b.   Kremer argued that increases in population would reduce the amount of human and physical capital per worker so that eventually the standard of living would decline. Malthus argued that increases in technology would allow increased output growth so that even with population growth, society would enjoy a higher standard of living.

           c.    Malthus argued that with greater population, society would generate more ideas so that growth of real GDP per person could continue. Kremer argued that increasing population would outstrip agricultural production.

           d.   Malthus argued that increases in population would reduce the amount of human and physical capital per worker so that eventually the standard of living would decline. Kremer argued that increases in technology would allow increased output growth so that even with population growth, society would enjoy a higher standard of living.

ANSWER: a.     Kremer argued that with greater population, society would generate more ideas so that growth of real GDP per person could continue. Malthus argued that increasing population would outstrip agricultural production.

25.      For two people who are planning to trade, it is impossible to

           a.   have a comparative advantage in both goods.

           b.   have an absolute advantage in both goods.

           c.    specialize in the production of one good.

           d.   trade so that both people will be better off.

ANSWER: a.     have a comparative advantage in both goods.

26.      Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that

           a.   Mike has a comparative advantage in tables.

           b.   Sandy has an absolute advantage in chairs.

           c.    Mike has an absolute advantage in tables.

           d.   Sandy has a comparative advantage in tables.

ANSWER: d.     Sandy has a comparative advantage in tables.

27.      Anna, a U.S. citizen, works only in Germany. The value added to production from her employment is included

           a.   only in U.S. GDP.

           b.   only in German GDP.

           c.    in both German and U.S. GDP.

           d.   in neither German nor U.S. GDP.

ANSWER: b.     only in German GDP.

28.      If you buy a burger and fries at your favorite fast food restaurant

           a.   neither GDP nor consumption spending will be affected because you would have eaten at home if you hadn't eaten at the restaurant.

           b.   GDP will be higher, but consumption spending will be unchanged.

           c.    GDP will be unchanged, but consumption spending will be higher.

           d.   both GDP and consumption spending will be higher.

ANSWER: d.     both GDP and consumption spending will be higher.

29.      Suppose that the real interest rate was 3 percent and the inflation rate was 1 percent.

           a.   The dollar value of savings increased at 2 percent, and the value of savings measured in goods increased at 3 percent.

           b.   The dollar value of savings increased at 1 percent, and the value of savings measured in goods increased at 2 percent.

           c.    The dollar value of savings increased at 3 percent, and the value of savings measured in goods increased at 1 percent.

           d.   The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent.

ANSWER: d.     The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent.

30.      Which of the following have been suggested as remedies for low growth in many African countries?

           a.   reduce corporate taxes

           b.   cut import tariffs and end export taxes on agricultural products

           c.    focus government spending on basic public health, education, and internal order

           d.   All of the above are correct.

ANSWER: d.     All of the above are correct.