Macro Midterm Questions 1-23

A new county jail is not an example of a consumption expenditure because it is not a good or service that is consumed by individuals for personal use or enjoyment. Consumption expenditures typically refer to the purchase of goods or services that are used up or enjoyed immediately, such as a restaurant meal, a motorcycle, or a digital camera. However, a new county jail is a public infrastructure project that is funded by the government and used for law enforcement purposes, rather than being directly consumed by individuals.

Expenditures on intermediate goods are not considered a component of value added for a firm. Value added is the difference between the value of a firm's output and the value of its inputs, and it represents the firm's contribution to the overall economy. While expenditures on intermediate goods are necessary for production, they do not directly contribute to the value added because they are already accounted for in the final price of the firm's output. Therefore, they are not considered a separate component of value added.

During periods of poor economic performance, real GDP declines as businesses produce less and consumers spend less. This leads to a decrease in economic output and a decline in GDP. At the same time, unemployment typically rises as businesses lay off workers in order to cut costs and reduce production. This increase in unemployment is a result of the decrease in economic activity and the reduced demand for labor. Therefore, the correct answer is that real GDP declines and unemployment rises during periods of poor economic performance.

The correct answer is all individuals of work age, regardless of whether they are working or looking for a job. Economists define the labor force to include all individuals who are of working age, regardless of their employment status or job search activity. This definition allows economists to measure the total number of people who are available and willing to work in an economy, providing a comprehensive view of the labor market. It includes both those who are currently employed and those who are actively seeking employment, as both groups are considered part of the potential workforce.

During recessions, businesses tend to reduce their workforce, leading to an increase in the unemployment rate. On the other hand, during booms, businesses expand and create more job opportunities, resulting in a decrease in the unemployment rate. Therefore, the unemployment rate rises during recessions and falls during booms.

When a new tax on hiring labor is imposed, it increases the cost of hiring labor for employers. As a result, the demand for labor decreases because employers are less willing to hire as many workers at the higher cost. With a decrease in demand for labor, real wages (the amount workers are paid adjusted for inflation) also decrease because there are fewer job opportunities available. Additionally, employment decreases because fewer workers are being hired due to the higher cost. Therefore, the correct answer is decrease; decrease; decrease.

The question "How has inflation increased over time?" would be considered a macroeconomic question because it pertains to the overall increase in prices in the economy over a period of time. Inflation is a key macroeconomic indicator that reflects the general rise in prices of goods and services, and studying its trends and patterns can provide insights into the overall health and stability of the economy.

Real business cycle theory emphasizes the role of technological change in causing economic fluctuations. This theory suggests that changes in technology can lead to shifts in productivity and output, which in turn affect business cycles. Technological advancements can create periods of economic growth and expansion, as well as periods of recession and contraction. These fluctuations are believed to be a natural part of the economic process, driven by changes in technology and its impact on production and consumption.

The correct answer is that microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole. This means that microeconomics focuses on analyzing the behavior and decision-making of individual consumers and firms within specific markets, while macroeconomics examines the overall performance and behavior of the entire economy, including factors such as inflation, unemployment, and economic growth.

If the current unemployment is close to the natural rate of unemployment, it suggests that the economy is operating at its potential level. In this scenario, the level of real GDP, which represents the total value of goods and services produced in an economy adjusted for inflation, is likely to be close to the level of potential output. The real GDP takes into account changes in prices over time, providing a more accurate measure of economic performance. Therefore, the correct answer is real.

When the quantity of labor supplied is equal to the quantity of labor demanded at the equilibrium wage rate, it means that there is no excess supply or demand for labor in the economy. This indicates that the labor market is in a state of balance, where all available labor resources are being utilized efficiently. At this point, the economy is operating at full-employment output, meaning that there is no cyclical unemployment and all available resources are being utilized to their maximum potential.

The downward sloping labor demand curve demonstrates that as the real wage increases, the amount of labor hired decreases. This is because as the real wage increases, it becomes more expensive for firms to hire labor, leading them to hire fewer workers. Conversely, as the real wage decreases, it becomes more affordable for firms to hire labor, resulting in an increase in the amount of labor hired.

The real GDP can be calculated by multiplying the quantity of each good produced by its respective price and summing them up. In 2009, the real GDP was (70 x $5) + (40 x $12) = $350 + $480 = $830. In 2010, the real GDP was (85 x $7) + (50 x $15) = $595 + $750 = $1345. The growth rate can be calculated by dividing the difference between the two years by the initial year and multiplying by 100. Therefore, the growth rate from 2009 to 2010 is (($1345 - $830) / $830) x 100 = 61.45%. Rounding it to the nearest whole number, the real GDP grew by about 31%.

Imposing an employment tax leads to decreased potential output in the economy because it increases the cost of hiring workers for businesses. This, in turn, reduces the incentive for businesses to hire new employees or expand their workforce. As a result, there is a decreased supply of labor as fewer job opportunities are available. Additionally, the higher cost of labor due to the tax may lead to job losses and unemployment. Overall, the employment tax creates a negative impact on the economy by limiting job growth and reducing the overall output and productivity.

The correct answer is to express the values of products in a common unit of measurement. By multiplying the quantities of goods by their prices, we can convert the physical output of different goods into a monetary value. This allows us to compare and add up the values of different goods and services produced in an economy, regardless of their nature or unit of measurement. It provides a standardized way to measure the overall economic activity and track changes over time.

When a country is experiencing persistent deflation, it means that the overall price level is consistently decreasing over time. In this scenario, real GDP (which is adjusted for inflation) would be greater than nominal GDP (which is not adjusted for inflation) before the base year because prices were higher in the past. Similarly, real GDP would also be less than nominal GDP before the base year because prices were lower in the past. Therefore, both options B and C are correct.

At the point of diminishing returns, the fixed input becomes a constraint on the production process. This means that increasing the variable input will still lead to an increase in output, but at a decreasing rate. This is because the fixed input cannot be changed and eventually limits the efficiency of the production process. Therefore, output will increase, but at a decreasing rate.

In the classical model, it is assumed that markets are perfectly competitive and that wages and prices are fully flexible. This means that wages and prices can easily adjust to changes in supply and demand without any barriers or restrictions. This flexibility allows markets to reach equilibrium quickly and efficiently, ensuring that resources are allocated optimally. Therefore, the correct answer is that wages and prices are fully flexible in the classical model.

As unemployment falls, inflation increases. This is because when there is low unemployment, there is high demand for labor, which leads to higher wages. Higher wages then increase the cost of production for businesses, causing them to raise prices. This increase in prices results in inflation. Therefore, there is a positive relationship between unemployment and inflation, where a decrease in unemployment leads to an increase in inflation.

The correct answer is that GDP understates the value of output produced by an economy because it excludes value added from the underground economy, such as tips taken "under the table". This is because the underground economy consists of economic activities that are not reported to the government and therefore not included in official GDP calculations. These activities, such as unreported income from tips, contribute to the overall economic output of a country but are not accounted for in GDP measurements, leading to an understatement of the true value of output produced.

European workers work fewer hours than American and Japanese workers, which means they have more leisure time. This increased leisure time would lead to a decrease in the supply of labor in Europe. As a result, the labor supply curve would shift to the left.

The real GDP in 2010 (in 2009 dollars) can be calculated by multiplying the quantity produced in 2010 by the price level in 2009. In this scenario, the quantity produced in 2010 is 85 flashlights and 50 fishing lures. The price level in 2009 is given as $5 for flashlights and $12 for fishing lures. Therefore, the calculation would be (85 x $5) + (50 x $12) = $1090.

If workers develop a greater taste for leisure and require more time away from work, it means they are less willing to work longer hours. This decrease in the supply of labor leads to an increase in wages since there is now a higher demand for a limited supply of workers. However, the quantity of labor hired decreases as employers are less willing to hire a larger workforce at higher wages.