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Department of Economics College of Saint Benedict | Saint John's University Fall Semester 2015 Louis Johnston Economics 111– Introduction to Economics Quiz #1 September 23, 2015 Name:______________________________________________________________________ You have 25 minutes to complete this quiz. Answer all questions. Please circle your answer to each question directly on this sheet. 1. The cost of a trade-off is known as the ________ of that decision. a. average cost b. net cost c. opportunity cost d. comparative cost 2. The market value of all final goods and services produced within a country during a given period of time is also equal to the total amount spent by _________ minus all spending on imported goods and services. a. domestic firms and domestic governments b. domestic households, domestic firms and buyers outside the country c. domestic households, domestic governments and buyers outside the country d. domestic households, domestic firms, domestic governments, and buyers outside the country 3. Suppose that a pizza maker pays $1 for tomatoes, $1 for cheese, $2 for sausage, and sells the pizza made with these ingredients for $7. How much does each pizza sold contribute to GDP? a. $3 b. $4 c. $7 d. $11 Note: $7 is the value of the final good so that is how the pizza contributes to GDP. You could also take the $4 of value added created by the ingredient producers plus the $3 value added by the pizza maker and get (again) $7. 4. Which of the following transactions would increase the investment component of U.S. GDP? a. A laundry in Seattle purchases a new clothes washer produced in Mexico. b. A laundry in Mexico purchases a new clothes washer produced in the U.S. c. You purchase for your home a new clothes washer produced in the U.S. d. You purchase for your home a new clothes washer produced in France. Note: Neither (c) nor (d) can be correct since they involve household purchases, which count as consumption. (b) is not correct because the purchase counts as a US export, not as investment. 5. If nominal gross domestic product (GDP) rises from one year to the next, then a. the economy must be producing a larger output of goods and services. b. the prices at which goods and services are sold must have risen. c. either the economy must be producing a larger output of goods and services, or the prices at which goods and services are sold must be higher. d. net exports must be falling. 6. Suppose that in 2011 nominal GDP equaled $600.6 billion and real GDP equaled $546.0 billion (in 2009 prices). What was the GDP deflator in 2011? Round to the nearest decimal. a. 54.6 b. 154.6 c. 90.9 d. 110.0 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 × 100 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 600.6 × 100 = 110.0 546.0 7. The GDP deflator and the Consumer Price Index (CPI) both measure a. the total amount of goods and services produced within a country during a given year in the prices of that year. b. the general level of prices relative to a base year. c. the total amount of goods and services produced within a country during a given year in the prices of a base year. d. the price of a specific good during the course of a year. 8. Suppose that the total expenditures for a typical household in 2000 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2005 was $3,000. If 2000 is the base year, the CPI for 2000 equals: a. 125 b. 83 c. 100 d. 120 Note: the year 2000 is the base year so the CPI must equal 100 that year. 2 9. The average price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 42. The cost of a gallon of gasoline was $3.00 in 2009 when the CPI equaled 214. The real cost of a gallon of gasoline between 1972 and 2009 a. increased. b. decreased. c. remained constant. d. may have either increased or decreased. 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑎𝑠 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑋 (𝑖𝑛 𝐶𝑃𝐼 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑑𝑜𝑙𝑙𝑎𝑟𝑠) = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑎𝑠 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑋 × 100 𝐶𝑃𝐼 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑋 0.35 × 100 = 0.83 42 3.00 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑎𝑠 𝑖𝑛 2009 (𝑖𝑛 𝐶𝑃𝐼 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑑𝑜𝑙𝑙𝑎𝑟𝑠) = × 100 = 1.40 214 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑎𝑠 𝑖𝑛 1972 (𝑖𝑛 𝐶𝑃𝐼 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑑𝑜𝑙𝑙𝑎𝑟𝑠) = 10. The Consumer Price Index (CPI) in 1930 equaled 17. The CPI in 1931 equaled 15. The inflation rate between 1930 and 1931 was ____ percent. a. -13.3 b. -11.8 c. 1.5 d. 11.8 inflation rate (π) = inflation rate (π) = Pthis year − Plast year Plast year 15 − 17 = −0.118 = −11.8% 17 11. The real interest rate is a. the nominal interest rate corrected for inflation. b. the interest rate quoted to a borrower at a bank. c. the nominal interest rate minus the inflation rate. d. both a and c are correct. 12. Suppose that on January 1, 2004, Edward invested $10,000 at 5% interest for one year. The CPI on January 1, 2004, stood at 160. On January 1, 2005, the CPI was 176. The real rate of interest earned by Edward was ____ percent. a. -5 b. 0 c. 5 d. 8 The inflation rate is 10%, so the real interest rate is 5% - 10% = -5%. 13. A borrower and lender agree to a nominal interest rate on a loan when inflation is expected to be 7% per year. The actual inflation rate turns out to be 10% per year. This means that the borrower ____ and the lender ____. a. gains; gains 3 b. gains; loses c. is not affected; gains d. loses; gains 14. The participation rate is the number of people a. employed divided by the labor force. b. employed divided by the civilian, non-institutionalized, working-age population. c. employed and unemployed divided by the labor force. d. employed and unemployed divided by the civilian, non-institutionalized, working-age population. 15. Which of the following two types of unemployment occur even when the economy is healthy and growing? a. frictional and structural b. cyclical and frictional c. structural and cyclical d. frictional and practical Use the following table to answer question 16: Number of people in group (millions) Group Civilian, non-institutionalized, working-age population. Not in labor force Employed Unemployed 16. 243 89 142 12 According to the table, the unemployment rate in this economy is equal to: a. 4.9%. b. 92.2%. c. 63.4%. d. 7.8%. Unemployed 12 12 = = = 0.778 = 7.8% Labor force 142 + 12 154 4