ECON 104 Study Guide - Durable Good, Arthur Melvin Okun, Market Basket

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30 Oct 2014

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Mcbr chapter 7 review questions: suppose an economy"s real gdp is ,000 in year 1 and ,000 in year 2. Assume that population was 100 in year 1 and 105 in year 2. The per capita growth can be calculated as follows: per capita in year 1 (,000/100); . 81 per capita in year 2 (,000/105). Answer: industries specializing in consumer durable goods production and capital goods production are hardest hit. When economic activity slows, people postpone purchases of durable goods which worsens the downturn. Likewise, businesses postpone the purchase of new equipment and plant expansion if they expect a downturn. These slowdowns in business spending cause further deterioration in economic activity: in the table below are statistics showing the labor force and total employment during year. Make the computations necessary to complete the table. (number of persons is in thousands. )

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4. Consider a farmer who can either plant or market/consume his crop. Whatever amount he plants becomes a crop twice the size the following year. For example, if he plants seed from 2 ears of corn, he gets 4 ears of corn at harvest. Assume he starts off with 50 bushels of corn.

a. If he decides every year to market/consume half his crop and plant the rest, what will his harvest be next year? What will his consumption be? How fast will his production and consumption grow over time?

b. If he decides every year to market/consume 2/5 of his crop and plant the rest, what will his harvest be next year? What will his consumption be? How fast will his production and consumption grow over time?

c. Compare the consumption of the farmer in each of the first five years under plans a. and b.

d. Why might the results of plan b. not be realistic?

5. Imagine the following goal of Lenin/Stalin at the beginning of the Soviet regime in Russia: to overtake (i.e. equal) and surpass the worldâs industrialized economies in terms of GDP per capita. To achieve this goal, the main instrument of control is the fraction of national production that is devoted to building the nationâs productive capacity: new machines, factories, transportation equipment, and roads. That is, the main instrument to achieve this goal is what fraction of GDP to devote to investment. The rest of national production is used for consumption, i.e. to produce consumer items like clothing and food. The country begins with relatively little capital, being mostly rural and non-industrialized. Assume each of the following: ï· GDP per capita starts in USSR at $300/year. ï· The worldâs industrialized economies start with GDP per capita of $5000/year. ï· Population growth rates are 2% everywhere in the world. ï· All capital depreciates at 8% per year.

a. At what average annual rate will income per capita in the USSR have to grow in order to overtake (i.e. to equal) the industrialized nationsâ income per capita in exactly 30 years? Assume the industrialized nationsâ income per capita is growing at 2% per year.

b. If the USSR sustains the growth rate of part a., how long after it has overtaken the industrialized nationsâ GDP per capita will it take for it to attain double the industrialized nationsâ GDP per capita? Again, assume the industrialized nationsâ GDP per capita is growing at 2% per year. For parts c.-e., assume the basic growth framework of Harrod-Domar, and that 1 rubleâs worth of capital always produces 0.5 rubleâs worth of output (i.e. A=0.5). Also, assume inputs are used more efficiently in the industrialized countries, so that A=0.6 there.

c. What fraction of national output must the USSR devote to building new capital goods in order to attain the growth rate of part a.? What fraction would be left for consumer items? [Hint: another word for the fraction of output devoted to building new capital goods is the investment rate, i.e. the ratio It/Yt. And, remember that savings equals investment, so the investment rate equals the savings rate.]

d. At what rate are the industrialized countries saving if they are growing at 2% per year? e. What would you calculate the ratio of consumption per capita in the USSR to consumption per capita in the industrialized countries when the USSR overtakes the industrialized countries (i.e. when GDP per capita is equal)? Assume the savings rates of parts c. & d. What would the ratio be when the USSR reaches double the industrialized nationsâ GDP per capita?

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.

The town of York produces three goods, Good A, Good B, and Good C. The following is information regarding York's production of these three goods and their prices over 3 years. Use 2015 as a base year (i.e., 2015 = 100).

Year 2014 Year 2015 Year 2016

Quantity of Good A: 3 4 5

Price of Good A: $10 $10 $11

Quantity of Good B: 10 10 10

Price of Good B: $2 $4 $6

Quantity of Good C: 2 4 6

Price of Good C: $5 $6 $7

GDP questions:

1) What is the total money value of Good A that's produced in 2015?

2) Calculate the nominal (or current dollar) GDP for 2014.

3) Calculate the real (or constant dollar) GDP for 2014.

4) Calculate the real (or constant dollar) GDP for 2015.

5) What is the real economic growth rate from 2014 to 2015?

6) What is the real GDP per capita for 2014, assuming the population equals 10 individuals?

7) Calculate the GDP deflator for 2014, 2015, and 2016.

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ECON 104 Study Guide - Durable Good, Arthur Melvin Okun, Market Basket

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