EC290 Lecture Notes - Lecture 10: Government Policy Statement, Index Set, Real Wages

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29 Nov 2017

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We will do the practice questions for chapters 9 and 10 together. Look at figure 9-3 and answer the following questions. If you visit the site http://www. statcan. gc. ca/daily-quotidien/170310/dq170310a-eng. htm and make use of table 1. Labour force characteristics by age and sex seasonally adjusted. What does this data indicate about the change in labour markets in canada from. Y=an a>0 a is the productivity of labour measured in units of real output. N < l l is a fixed total labour force u + n = l. W = pe ( z/u) u = u/l. P = ( 1 + m ) w m > 0. Derive the expression for the natural rate of unemployment un. Derive the expression for the medium-run equilibrium real wage. Derive the equation that links the value of u to the value of y. Derive the equation for the short-run aggregate supply curve (as). As curve drawn for a given value of pe.

Related Questions

Which of the following statements has been proposed as a benefit of passive policy making?

		Passive policy making utilizes the rational expectations hypothesis.
		Passive policy making allows for making immediate changes in response to an anticipated change in economic performance.
		When using passive policy making there is no tradeoff between price stability and unemployment.
		Passive policy making does not wait for the time lag between recognition of a problem and policy action before engaging in economic policies to stabilize the economy.

1.47 points

QUESTION 6

The idea of policy making taking place in response to a predetermined set of rules is referred to as

		discretionary policy making.
		passive policy making.
		Keynesianism.
		active policy making.

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QUESTION 7

What types of unemployment will still exist when the economy is at the natural rate of unemployment?

		frictional and cyclical unemployment only
		frictional, structural, and cyclical unemployment
		frictional and structural unemployment only
		structural and cyclical unemployment only

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QUESTION 8

The natural rate of unemployment is

		the unemployment rate that exists in long-run equilibrium, after adjustments to all changes have occurred.
		the unemployment rate when there is no structural unemployment.
		the unemployment rate when there is no structural or cyclical unemployment.
		zero.

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QUESTION 9

According to the text, minimum-wage laws cause increases in

		employment possibilities.
		structural unemployment.
		poverty.
		productivity.

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QUESTION 10

During a recession, the overall unemployment rate

		exceeds the natural rate of unemployment.
		falls below the natural rate of unemployment.
		falls rapidly.
		equals the inflation rate.

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QUESTION 11

Cyclical unemployment is

		the unemployment due to the unemployment benefits and welfare programs of the government.
		the unemployment due to union activities and government-imposed restrictions to entry into specific occupations.
		the difference between the actual unemployment rate and the natural rate of unemployment.
		the difference between the unemployment rate when the economy is in a recession and the unemployment rate when the economy is at the peak of an expansion.

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QUESTION 12

Which of the following unemployment rates can be negative?

		the natural unemployment rate
		the seasonal unemployment rate
		the official unemployment rate reported by the Bureau of Labor Statistics
		the cyclical unemployment rate

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QUESTION 13

An unexpected increase in aggregate demand typically causes

		the price level to increase but has no effect on the unemployment rate.
		frictional unemployment to increase but structural unemployment to decrease.
		the price level to increase and the unemployment rate to fall.
		the price level to increase and the unemployment rate to increase.

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QUESTION 14

The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is known as the

		non-accelerating-inflation rate of unemployment (NAIRU).
		contrary rate of unemployment.
		Phillips rate of unemployment.
		menu cost rate of unemployment.

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QUESTION 15

Based on the work of economist A.W. Phillips, economists concluded that

		high inflation rates are associated with low unemployment rates.
		higher rates of inflation are associated with higher rates of unemployment.
		there is no trade-off between inflation and unemployment.
		unemployment can be effectively combated by raising wages.

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QUESTION 16

What happens to the Phillips curve when the expected rate of inflation rises?

		The curve shifts to the right
		The curve shifts to the left
		The Phillips curve is unaffected
		The curve becomes horizontal

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QUESTION 17

The short-run Phillips curve suggests what policy making implications?

		Passive policy making is more effective than active policy making.
		Active policy making does not yield any predictable results.
		Maintaining both the inflation and unemployment rates at low levels is possible if policy makers will rely solely on nondiscretionary policy making.
		Using discretionary policies, it may be possible to achieve just the right unemployment and inflation mix.

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QUESTION 18

We observe the duration of unemployment falling and wage rates rising. It is likely that

		aggregate supply has increased.
		aggregate demand has increased.
		summer has arrived.
		the government has initiated expansionary fiscal policy but the policies haven't taken effect yet.

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QUESTION 19

Policymakers' attempts to use the Phillips curve to reduce the unemployment rate below the natural rate

		will be successful since the Phillips curve shows the relationship between the inflation rate and the unemployment rate.
		will be unsuccessful if monetary policy is used since monetary policy leads to higher prices.
		will be successful if monetary policy is used.
		will be unsuccessful since workers' expectations adjust to attempts to reduce unemployment below the natural rate.

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QUESTION 20

Which one of the following would likely reduce the level of structural unemployment?

		strengthening restrictions on who can be licensed to enter certain professions
		increasing the minimum wage to encourage more people to work
		increasing the level of union bargaining power
		limiting unemployment insurance benefits

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QUESTION 21

An unexpected decrease in aggregate demand

		will decrease real GDP, but will not affect the rate and duration of unemployment.
		will decrease the price level.
		will decrease long-run aggregate supply.
		will decrease the average duration of unemployment.

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QUESTION 22

When a person bases her future expectations for the economy on all available current data and her own judgment about future policy effects, this is known as

		rational expectations.
		irrational expectations.
		the policy irrelevance proposition.
		the new classical theory.

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QUESTION 23

According to the rational expectations hypothesis, monetary policy can have real effects on such variables as real Gross Domestic Product (GDP) in the short run

		when the Federal Reserve's open market committee operates as expected in either buying or selling bonds.
		regardless of whether the policy is anticipated or unanticipated.
		only when the policy is unsystematic and unanticipated.
		only when the policy is anticipated.

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QUESTION 24

Rational expectations theory suggests that short-run stabilization policy

		should not be attempted.
		is best achieved with fiscal policy.
		is best achieved with monetary policy.
		is equally easy to achieve with monetary or fiscal policy.

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QUESTION 25

Proponents of the policy irrelevance proposition believe that, under the assumption of rational expectations, the unemployment rate will

		go down whenever the Fed announces an anticipated fiscal policy change.
		equal the natural rate of unemployment in the long run, regardless of any monetary policy actions.
		always be higher in the long run than the natural rate of employment.
		go up whenever the Fed announces an anticipated monetary policy change.

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QUESTION 26

For the policy irrelevance theorem to hold, people must

		not persistently make the same mistakes in forecasting the future.
		know exactly what the Fed is planning to do.
		know the future perfectly.
		never make mistakes in their forecasts, even when they do not know the future perfectly.

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QUESTION 27

According to the policy irrelevance proposition, the impact of an anticipated expansionary monetary policy will be to

		increase the price level in the long run.
		increase the real Gross Domestic Product (GDP) in the long run.
		decrease the natural rate of unemployment.
		decrease the price level and the unemployment rate.

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QUESTION 28

One key assumption lying behind the policy irrelevance proposition is that

		prices are "sticky" upward.
		wages are "sticky" downward.
		markets are not purely competitive.
		the rational expectations hypothesis is correct.

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QUESTION 29

According to the real business cycle theory, an increase in an input price, such as oil, will

		increase both real Gross Domestic Product (GDP) and the price level.
		increase real Gross Domestic Product (GDP) but not change the price level.
		decrease both real Gross Domestic Product (GDP) and the price level.
		decrease real Gross Domestic Product (GDP) but increase the price level.

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QUESTION 30

When "stagflation" occurs,

		the economy experiences higher inflation rates and higher unemployment rates at the same time.
		the economy experiences lower inflation rates and higher unemployment rates at the same time.
		the economy experiences higher inflation rates and lower unemployment rates at the same time.
		the economy experiences lower inflation rates and lower unemployment rates at the same time.

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QUESTION 31

When a supply shock is permanent

		only the short-run aggregate supply curve shifts leftward.
		only the long-run aggregate supply curve shifts leftward.
		there are no shifts in either the long-run or short-run aggregate supply curve.
		both the long-run and short-run aggregate supply curves shift leftward.

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QUESTION 32

According to economists who promote sticky-price theories,

		only monetary policy is an effective stabilization policy.
		only fiscal policy is an effective stabilization policy.
		both fiscal and monetary policy can be effective stabilization policies.
		neither fiscal nor monetary policy is an effective stabilization policy.

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QUESTION 33

Some economists suggest that because of the costs of negotiating contracts, printing price lists, etc., it is costly for firms to change prices in response to demand changes. This hypothesis is known as the

		menu cost theory.
		Phillips theory.
		Freidman theory.
		sticky wage theory.

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QUESTION 34

The menu cost theory suggests that

		wages and prices move freely and quickly.
		there will be no unemployment.
		firms find frequent price changes to be costly.
		the economy is characterized only by perfect competition.

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QUESTION 35

In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand known as inflation dynamics is

		initially speedy upward adjustment of the price level and inflation in response to higher aggregate demand followed by lower inflation in the future.
		initially sluggish downward adjustment of the price level and inflation in response to higher aggregate demand followed by lower inflation in the future.
		initially sluggish upward adjustment of the price level and inflation in response to higher aggregate demand followed by higher inflation in the future.
		initially speedy upward adjustment of the price level and inflation in response to higher aggregate demand followed by higher inflation in the future.

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QUESTION 36

Menu costs are a possible reason for

		swings in the labor force participation rate.
		sticky product prices.
		aggregate supply shocks.
		low levels of consumer confidence in response to aggregate supply shocks.

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QUESTION 37

New Keynesians hypothesize that

		the relationship between inflation and unemployment is exploitable in the short run.
		fluctuations in output are largely caused by supply shocks.
		the relationship between inflation and unemployment is exploitable in the long run.
		there is no relationship between inflation and unemployment.

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QUESTION 38

Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because

		unemployment levels and the inflation rate have a negative (inverse) relationship.
		unemployment levels and the inflation rate have a clear, positive relationship.
		economic participants routinely incorporate changes in the inflation rate into their expectations.
		economic participants are not rational, and therefore act unpredictably to any policy change.

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QUESTION 39

When it comes to active policy making most economists agree that

		it is unlikely that active policy making will have any long term effects on the economy.
		it will lead to long term shocks in the system.
		it is likely that active policy making will have long term effects on the economy.
		active policy making should be used over passive policy making.

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QUESTION 40

If population growth occurs while jobs are difficult to obtain or labor force participation does not increase,

		economic growth will be robust because any population gain is a plus.
		per capita GDP is likely to increase sharply.
		there may be little or no increase in a nation's labor resources.
		a nation's labor resources will still continue to increase in both quality and quantity.

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QUESTION 41

If the level of aggregate real Gross Domestic Product (GDP) remains constant, a reduction in the population

		indirectly reduces per capita real GDP.
		directly reduces per capita real GDP.
		directly increases per capita real GDP.
		has no effect on real per capita real GDP.

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QUESTION 42

Suppose a nation's real Gross Domestic Product (GDP) grows at a constant rate of 5 percent per year while its population grows 2 percent annually. Given this information, this nation's annual rate of per capita real GDP growth is approximately equal to

		2 percent
		1 percent
		5 percent
		3 percent

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QUESTION 43

In the determination of economic growth, political freedom

		is equally as important as economic freedom.
		appears to be less important than economic freedom.
		contributes little to job growth.
		is more important than economic freedom.

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QUESTION 44

Political freedom can sometimes moderately reduce economic growth because

		special interest groups may gain at the expense of the overall economy.
		campaign contributions rob the economy of investment.
		most jobs are in unions that are politically connected.
		none of the above.

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QUESTION 45

Economic freedom is

		the right to own private property and to exchange goods with minimal government interference.
		present as long as private individuals own businesses.
		the amount of control that the government has in a market.
		the right to vote in an election for a political leader.

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QUESTION 46

The right to openly support and democratically select national leaders is

		population freedom.
		political freedom.
		economic freedom.
		capital freedom.

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QUESTION 47

Economic growth is measured by

		the annual percentage change in nominal GDP.
		the annual percentage change in per capita real GDP.
		the annual percentage change in per capita nominal GDP.
		the annual percentage change in the unemployment rate.

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QUESTION 48

Laws that make it difficult to start a new business lead to a

		laissez-faire.
		low rate of economic growth.
		high rate of economic growth.
		more political freedom.

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QUESTION 49

Dead capital is

		any capital resource that lacks clear title of ownership.
		machinery that requires constant maintenance.
		machinery that fails to operate properly.
		a capital resource that depreciates rapidly.

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QUESTION 50

The significance of dead capital is that

		it is being removed from its most efficient use.
		it is difficult to allocate to its most efficient use.
		its fixed cost is too high.
		it replaces too many workers.

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QUESTION 51

Developing countries are damaged by dead capital because

		it replaces too many workers, creating unemployment.
		resulting inefficiencies greatly reduce the rate of return on investment.
		it must be sold as scrap.
		none of the above.

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QUESTION 52

The role that dead capital plays in a country's economic growth is that

		growth neither increases nor is impaired by dead capital.
		growth increases because the dead capital is replaced with more technologically efficient capital.
		growth increases since the firms using the dead capital are using it for free.
		growth is impaired since the capital cannot be allocated to its most efficient use.

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QUESTION 53

When government inefficiencies exist,

		a country tends to grow at a faster rate.
		economic growth is not influenced.
		dead capital is usually not a problem.
		a country tends to grow at a slower rate.

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QUESTION 54

The acquisition of more than 10 percent of the shares of ownership in a company in another nation is called

		gross private international investment.
		majority investment.
		foreign direct investment.
		portfolio investment.

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QUESTION 55

Most international investment finance today comes from

		portfolio and foreign direct investment.
		the sale of antiques.
		government financing.
		tax collections.

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QUESTION 56

Portfolio investment means buying

		livestock.
		less than 10 percent ownership in a foreign company.
		a life insurance policy when traveling abroad.
		more than 50 percent ownership in a foreign company.

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QUESTION 57

The primary motivation for private foreign investment in developing nations is

		to eradicate poverty.
		to improve the standard of living for workers.
		the potential for high rates of return.
		to do research in countries with fewer social regulations.

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QUESTION 58

An international financial crisis is most often caused by

		a nation's central bank lowering domestic interest rates.
		a drop in the value of the U.S. dollar.
		foreign investments and loans being withdrawn from a nation.
		a government refusing to pay its dues to the United Nations.

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QUESTION 59

Adverse selection is a barrier to financing global growth because

		there is the possibility that the funds are used for riskier behavior than the lender agreed to.
		firms sometimes have trouble determining whether they need funds or not.
		if investors have trouble identifying high-risk firms they may be unwilling to lend funds to creditworthy firms.
		of the differences between financing using loans, portfolio investment and foreign direct investment.

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QUESTION 60

Moral hazard is a barrier to financing global growth because

		there is the possibility that the funds are used for riskier behavior than the lender agreed to.
		if investors have trouble identifying high-risk firms they may be unwilling to give money to creditworthy firms.
		firms sometimes have trouble determining whether they need funds or not.
		of the differences between financing using loans, portfolio investment and foreign direct investment.

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QUESTION 61

Two types of asymmetric information that create problems for international investment are

		adverse hazard and moral selection.
		adverse hazard and moral hazard.
		adverse selection and moral selection.
		adverse selection and moral hazard.

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QUESTION 62

The multinational agency that specializes in making loans to developing nations in an effort to promote long-term development and growth is the

		International Monetary Fund.
		United Nations Development Program.
		World Trade Organization.
		World Bank.

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QUESTION 63

The multinational organization that aims to promote world economic growth by fostering financial stability is the

		World Bank.
		United Nations.
		International Monetary Fund.
		World Trade Organization.

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QUESTION 64

A nation's account with the IMF is called its

		deposit surplus.
		capital account.
		current account.
		quota subscription.

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QUESTION 65

The international unit of accounting used by the International Monetary Fund (IMF) is called

		the Eurodollar.
		the IMF dollar.
		the quota subscription.
		special drawing rights.

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QUESTION 66

The International Monetary Fund (IMF) was created to achieve each of the following goals EXCEPT

		to supervise exchange-rate practices of member countries.
		to help finance economic development in poor countries.
		to encourage convertibility of member countries' currencies.
		to lend funds to countries having difficulties meeting their international payment obligations.

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QUESTION 67

The World Bank specializes in making loans to promote

		short-term assistance when a nation experiences a financial crisis.
		financial stability.
		so-called stand-by arrangements and credits.
		long-term development and growth.

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QUESTION 68

The International Monetary Fund

		is the bank that causes international financial crisis when the reserves are too high.
		is a central bank like the Federal Reserve System.
		is a multinational organization that aims to promote world economic growth through more financial stability.
		is a multinational agency that specializes in making loans to promote long-term development and growth in developing countries.

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Question 3

According to Joseph Schumpeter, the theory of creative destruction describes a process by which

	A	some new products unleash a gale of destruction that drive other new products out of the market.
B		new products unleash a gale of destruction that drives old products out of the market.
C		new products are created by the destruction of capital.
D		the creation of new products never involves the destruction of old products.

Question 4

Which of the following countries had the highest GDP per capita in 2012?

		A Qatar
B		United States
C		Japan
D		Norway

Question 5

________ save a ________ of their income. This ________ capital in their economy and raises economic growth.

	A	Developing countries; large proportion; decreases
B		Developing countries; small proportion; increases
C		High-income countries; large proportion; increases
D		High-income countries; small proportion; increases

Question 6

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A		government
B		households
C		banks
D		firms

Question 7

The U.S. economy has been more stable since 1950.

True

False

Question 8

When the economy reaches a trough in a business cycle, which of the following will occur?

A		Income, production, and employment will continue to fall.
B		Income, production, and employment will begin to rise.
C		Income and production will rise, but employment will continue to fall.
D		Employment rises, but income and production will continue to fall.

Question 9

In a closed economy, what is the relationship between saving and investment?

A		Saving is greater than investment.
B		Investment is greater than saving.
C		Investment is equal to saving.
D		Investment may be greater or smaller than saving.

Question 10

The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.

A		labor; real GDP; technology
B		capital; real GDP; technology
C		labor; capital; real GDP
D		capital; labor; real GDP

Question 11

New growth theory states that increases in ________ capital will result in ________ at the ________ level.

	A	knowledge; increasing returns to scale; firm
	B	physical; decreasing returns to scale; firm
	C	knowledge; decreasing returns to scale; economy
D		knowledge; increasing returns to scale; economy

Question 12

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

A		The British government was committed to upholding private property rights.
B		The British government was able to eliminate arbitrary increases in taxes.
C		The British government was able to more easily seize wealth.
D		Institutional changes by the British government helped protect wealth.

Question 13

Growth in real GDP per capita for the world economy was greatest during

A		the seventeenth century.
B		the eighteenth century.
C		the nineteenth century.
D		the twentieth century.

Question 14

Which of the following is a normative statement about economic growth?

A		Economic growth is associated with higher labor productivity growth.
B		Economic growth increases GDP per capita.
C		Economic growth hurts developing countries.
D		Foreign direct investment stimulates economic growth.

Question 15

The effect of a recession on a company like Whirlpool Corporation is such that

A		sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods.
B		profits fall less sharply as compared to firms that do not produce durable goods.
C		the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D		there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.

Question 16

For the recessions in the United States since the 1950s,

A		cyclical unemployment has been non-existent.
B		unemployment rises on average by about 1.2 percentage points 12 months after a recession begins.
C		unemployment falls on average by 2 percentage points 12 months after a recession begins.
D		unemployment rises on average about 5 percentage points 12 months after a recession begins.

Question 17

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

A		a reduction in sales taxes
B		an investment tax credit
C		a reduction in taxes on luxury yachts
D		All of these

Question 18

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

	A	the equilibrium interest rate will fall.
	B	business investment will fall.
	C	household savings will fall.
	D	None of these

Question 19

If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.

A		labor force participation
B		the quantity of goods or services that can be produced by one hour of work
C		the working-age population
D		nominal GDP

Question 20

Policies to promote growth by increasing saving and investment work through

A		decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
B		increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
C		increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
D		increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

1) Which of the following transactions would be included in GDP?

a) The purchase of a Monet painting.

b) The purchase of paper clips.

c) The purchase of Telstra shares.

d) The purchase of a used car.

2) Economics is the study of

a) the choices everybody makes to attain their goals, given their scarce resources.

b) supply and demand.

c) how to make money in a market economy.

d) how to make money in the stock market.

3) The economy is considered to be at full employment when

a) all unemployment is voluntary.

b) all unemployment is frictional or structural.

c) there are no unemployed workers.

d) there are more unemployed workers than job vacancies

4) An example of an intermediate good would be

a) a can of cool drink sold by a super‐market.

b) a microwave used at home.

c) the bread that goes into a sandwich sold by a lunch bar.

d) the petrol purchased by consumers for their cars

5) From 2004 to 2005, the CPI for medical care increased from 260.8 to 272.8. What was the inflation rate for medical care?

a) 12 percent

b) 11.1 percent

c) 4.9 percent

d) 4.6 percent

6) A shift outwards of the nation's production possibility frontier can occur from

a) a reduction in unemployment.

b) an increase in the size of the labour force.

c) a change in the amounts of one good desired.

d) a natural disaster like a hurricane or severe earthquake

7) What assumptions about humans do economists make?

a) People are greedy and selfish.

b) None, because economics takes humans as given.

c) People are rational and respond to incentives.

d) Humans prefer to live in a society that values fairness above all else.

8) The labour force is the

a) a number of people employed minus the number of people unemployed.

b) ratio of the number of people employed by the number of people unemployed.

c) ratio of the number of people employed to the working-age population.

d) the number of people employed plus the number of people unemployed.

9) The production possibility frontier shows

a) attainable combinations of two products that may be produced with available resources.

b) the various products that can be produced now and in the future.

c) what an equitable distribution of products among citizens would be.

d) the rate of substitution between capital and labour.

10) Which of the following transactions would be included in the official calculation of GDP?

a) Bridgestone sells $2 million worth of tyres to General Motors Holden

b) You illegally download music off the Internet to put on your new iPod.

c) A new iPod.

d) A student buys a used textbook at the bookstore.

11) What are the three fundamental questions that any economy must answer?

a) What will be the prices of goods, how will these goods be produced, and who gets them?

b) What will be the prices of goods, what will be produced, and who gets them?

c) What will be produced, how will these goods be produced, and who gets them?

d) How much will be saved, what will be produced, and how can these goods be fairly distributed?

12) If the nominal interest rate is 6% and the inflation rate is 2%, then the real interest rate is

a) 3%.

b) 2%.

c) 4%.

d) 8%.

14) Suppose that a very simple economy produces three goods: movies, burgers, and bikes. Suppose the quantities produced and their corresponding prices for 2004 and 2009 are shown in the following table:

	2004		2009
	Quantity	Price	Quantity	Price
Movies	20	$6	30	$7
Burgers	100	$2	90	$2.5
Bikes	3	$1000	6	$1100

What is real GDP in 2009, using 2004 as the base year?

a) $3690

b) $7035

c) $6360

d) $3320

15) If the production possibility frontier is graphed as a straight line, what does this mean?

a) Opportunity costs are constant as production shifts from one product to the other.

b) It is easy to efficiently produce output.

c) Nothing, there is no significance of a straight line production possibility frontier.

d) Opportunity costs are increasing as production shifts from one product to the other.

16) If you have both an economics exam and a management exam tomorrow, but find that you have time to fully study for only one of them, what are you facing?

a) A failing grade in both exams

b) A zero opportunity cost

c) A trade‐off

d) An impossible situation

17) Which of the following is a problem inherent in centrally planned economies?

a) Production managers do not satisfy consumer wants but the government's orders.

b) Too much production of low‐cost, high‐quality goods and services.

c) There are no problems, everyone, including consumers are satisfied.

d) None of these describe the problem inherent in a centrally planned economy.

18) Inflation is an increase in the

a) average hourly wage rate.

b) general price level in the economy.

c) the overall level of economic activity.

d) rate of growth of GDP.

19) Total production in the economy is measured as the

a) dollar value of all final goods and services produced in the economy.

b) the total number of services produced in the economy.

c) the total number of goods produced in the economy.

d) the total number of goods and services produced in the economy.

20) An increase in the price of dairy products produced domestically 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.

21) The reason that opportunity cost arises is that

a) money has proven to be an inefficient means of facilitating exchange in a market.

b) sometimes there are no alternative decisions that can be made.

c) resources are limited at any point in time. d) people have unlimited wants.

21) You have an absolute advantage whenever you

a) are better educated than someone else.

b) can produce something at a lower opportunity cost than others.

c) can produce more of something than others with the same resources.

d) prefer to do one particular activity.

22) Which of the following is an example of a worker experiencing cyclical unemployment?

a) A Freightliner employee who was sacked because of a recession.

b) A worker who quits his job because he does not get along with his boss

c) A worker that changes jobs to move closer to her family.

d) An assembly line worker who loses his job because of automation.

23) A company named Home Depot sells new and used doors to contractors who build new homes. Home Depot also sells new and used doors to home‐owners. Which of the following would be counted in GDP?

a) The sale of a used door to a home‐owner

b) The sale of a used door to for construction for installation into a new home.

c) The sale of a new door to for construction for installation into a new home.

d) The sale of a new door to home‐owner.

24) If you buy shares, the dollar value is

a) not included in GDP.

b) included in GDP under consumer expenditure.

c) included in GDP as a business expense.

d) included in GDP under-investment.

25) During the 1930s, Australia and other industrialised countries experienced the Great Depression with a large number of workers and factories unemployed.Which of the following points on a production possibility frontier model would represent this experience?

a) A point on the frontier

b) A point inside the frontier

c) An increase in the opportunity cost of the substitution between capital and labour

d) A point outside the frontier

26) How is the decision about what goods and services will be produced made in a market economy?

a) The government decides on what will be produced.

b) Producing firms decide to produce only what the firms' owners say must be produced.

c) By consumers, firms, and government choosing which goods and services to buy.

d) What will be produced is determined by what society needs the most.

27) In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes and 2 gallons of gasoline. The per‐unit prices of these goods have been as follows: Using 2002 as the base year, what was the inflation rate between 2003 and 2004?

a) 28.5 percent

b) 34.2 percent

c) 47 percent

d) It is impossible to determine without knowing the base year.

28) Given the following information, calculate the unemployment rate: Full‐time employed = 80 Part‐time employed = 25 Unemployed = 15 Discouraged workers = 5 Members of underground economy = 6 Consumer Price Index = 110

a) 18.8 per cent.

b) 12.5 per cent.

c) 16.7 per cent.

d) 25 per cent.

29) If the quantity of resources available is fixed, as more of a good is produced, the opportunity cost of producing it increases. The most probable reason for this is that

a) as more of a good is produced, the quality of technology available to produce additional units declines.

b) the price of the inputs used to produce the good will rise.

c) consumers are unwilling to pay higher prices to cover the increases in production costs.

d) resources are not equally well‐suited to producing all goods.

30) Which of the following is a normative statement?

a) The current high price of petrol is the result of strong worldwide demand.

b) The price of petrol is too high.

c) Larger vehicles always use more fuel per kilometre than smaller vehicles

d) The supply of petrol has not been able to meet the demand for petrol.

31) Transfer payments are not included in GDP because

a) they do not generate income.

b) their market value is difficult to measure.

c) they are not purchases of goods or services.

d) their value is included in government expenditure.

32) The opportunity cost of going to your economics class

a) depends on the cost of your transport getting to class.

b) is equal to the highest value of alternative use of the time.

c) is zero because there is no admission charged if you are enrolled in the class.

d) depends on the salary of the lecturer.

33) Establishing employment agencies that speeds up the process of matching unemployed workers with unfilled jobs are an attempt to lower

a) cyclical unemployment.

b) seasonal unemployment.

c) structural unemployment.

d) frictional unemployment.

34) Suppose that money GDP for 2009 was $15 000 billion and the price index was 150 and in 2010 money GDP was $17 050 billion with a price index of 155. What is the rate of economic growth?

a) 5%

b) 10%

c) 2%

d) 1%

35) An individual has a comparative advantage in activity whenever she

a) also has an absolute advantage in that activity.

b) can perform the activity at a lower opportunity cost than another person can.

c) can do everything better than everyone else can.

d) can do the activity in less time than anyone else.

36) GDP is not a perfect measure of wellbeing because

a) GDP is adjusted for increases in drug addiction.

b) GDP is not adjusted for the effects of pollution.

c) GDP is adjusted for changes in crime.

d) the value of leisure is included in GDP.

37) What does an entrepreneur do in a market economy?

a) Organise the factors of production in a working unit.

b) Stand to lose the personal funds provided.

c) Develop the vision for the firm and ensure funding for the firm.

d) An entrepreneur does all of these things.

38) An example of a transfer payment is

a) the purchase of a new government office block.

b) a teacher's pay is transferred electronically from the government to the teacher.

c) interest repayments on a loan.

d) an unemployment benefit.

39) Which of the following is a microeconomics question?

a) What will be the level of total production in the national economy?

b) How much income will be saved and how much will be spent on consumer goods?

c) What factors determine the price of computers in the market?

d) Why is the rate of unemployment rising?

40) The measure of production that values production using current prices is called

a) value-added GDP.

b) nominal GDP.

c) black economy GDP.

d) real GDP.

41) Which of the following causes the official measure of the unemployment rate to understate the true extent of joblessness?

a) People who collect unemployment benefits report themselves to be searching for a job.

b) Discouraged workers are counted as unemployed.

c) Discouraged workers are not counted as unemployed.

d) Many full-time workers really want to be part-time workers.

42) A production possibility frontier will shift inwards if

a) inefficiency in production processes arise.

b) there is an increase in the rate of unemployment.

c) productive resources are destroyed due to war.

d) all of these options are correct.

43) Structural unemployment would increase when

a) discouraged workers drop out of the workforce.

b) the economy enters a recession.

c) the number of individuals who quit their job to find another increase.

d) workers are replaced by machines and the workers do not have the skills to perform new jobs.

44) The 2005 CPI was 196 and the 1982 CPI was 96.5. If your parents put aside $1,000 for you in 1982, how much would you have needed in 2005 in order to buy what you could have bought with the $1,000 in 1982?

a) $1,834.20

b) $2,031.09

c) $2,308.89

d) None of the above is correct.

45) What is an economic model?

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EC290 Lecture Notes - Lecture 10: Government Policy Statement, Index Set, Real Wages

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