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ECONOMICS
Private Sector, Business Cycles and Economic Indicators
THORNTON
I. True/False (If FALSE, explain WHY)
1. Inflation occurs when prices decrease.
2. Inflation results from too much money in circulation.
3. If GDP changes from one year to the next it is the result of either a change in prices or a change in
the number of goods and services produced.
4. Intermediate goods are not counted for GDP.
5. When we calculated GDP using constant dollars we call that real GDP.
6. Nominal GDP never includes inflation.
7. GDP is used to measure economic growth from one year to the next.
8. If GDP is calculated using current price levels, growth may be the result of inflation.
9. Productive non-marketed activities make it difficult to accurately calculate GDP.
10. Real GDP is a better measure of economic growth than nominal GDP.
11. Expansionary business cycles are times of economic growth.
12. A contractionary business cycle can result in a recession.
13. Contractionary business cycles result in more production.
14. An economic recession is worse than an economic depression.
15. The unemployment rate is a measure of 16 yr. olds and older who are currently not working.
16. If you are over 16 years of age and not interested in finding a job, you don’t contribute to the
unemployment rate.
17. Unemployment increases the circulation of money.
18. Privately held corporations are usually the largest corporations.
19. A corporation charter is issued by the municipality a corporation is headquartered in.
20. When you buy a corporate bond you buy a share of ownership of a corporation.
21. Corporations are more difficult to start up than partnerships.
22. Sole proprietorships circulate more money than corporations.
23. Incorporating offers the owners of the business limited liability.
24. A dividend is the payment received when a person cashes in a corporate bond.
25. In a sole proprietorship, unlimited liability is a positive.
26. A limited partnership allows all partners limited liability.
27. In a limited partnership, profit is shared equally among the partners.
28. Limited liability protects business owners from being personally responsible for a corporation ’s
debts.
29. Partnerships are more difficult to start up than sole proprietorships.
30. In a limited liability partnership, partners are granted the same rights as shareholders in a
corporation.
31. Inflation allows people on fixed incomes to buy more goods.
32. Cost-push Inflation occurs when a firm passes on an increase in production costs to the consumer.
33. Demand-pull inflation occurs when there is 'too much money chasing too few goods' because the
demand for current
output exceeds supply.
34. By “double taxation” we mean that corporations have to pay twice as much income tax.
35. It is impossible for inflation to be “up” and unemployment to be “down” at the same time.
II. Answer “A” if the money in the following situations COUNTS for GDP
Answer “B” if the money SHOULD COUNT, but doesn’t
Answer “C” if the money SHOULD NOT COUNT
1. Paying someone cash to walk your dog.
2. The money you have to pay because your homeowner insurance went up because your dog bit
the walker.
3. The money your insurance salesman uses to pay a stockbroker for financial advice because he’s
just earned more money off you.
4. The money he uses to buy stock in an energy company the stockbroker said “couldn’t miss.”
5. The money he loses when the company goes bankrupt in a huge corporate scandal.
6. The money he pays “Big Eddy” to send the stockbroker “a message.”
7. The money the stockbroker must pay to install a security system at his house. The security
system company is recommended to him by a client who says “they’ll cut him a deal.” His
wife thinks their price is “too good to be true.”
8. The money the installers get for the stuff they stole from the stockbroker’s house when they
were installing the security system.
9. The money the stockbroker pays to buy a new diamond ring to replace the one the installers
stole before his wife finds out and kills him.
10. The value of the extra housework the stockbroker has to do to get out of the doghouse he’s in
because his wife found out anyway.
III. Short Essays
1. Explain why it is important to calculate both nominal and real GDP.
2. Why do we believe GDP is a good indicator of the health of the
economy?
3. Why might it be important to re-emphasize that inflation is not just
an increase in prices, but also an increase in the money supply?