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  1. The fundamental problem of economics is:
    The scarcity of resources relative to human wants
  2. A consequence of the economic problem of scarcity is that:
    Choices have to be made about how resources are used.
  3. With respect to factors of production, which of the following statements is not true?
    Only those resources that are privately owned are counted as factors of production.

    Even resources owned by governments count as scarce factors of production.
  4. Opportunity cost may be defined as the:
    Goods or services that are forgone in order to obtain something else.

    The opportunity cost is your best alternative that is forgone.
  5. A point on a nation's production-possibilities curve represents:
    The full employment of resources to achieve a particular combination of goods and services.

    Being on the curve is efficient, as we are getting the most we can out of our resources.
  6. The market mechanism:
    Works because prices serve as a means of communication between consumers and producers.

    Buyers choose how much to buy based on price; profitability and therefore production is driven by prices.
  7. The measure of new goods and services produced in the United States is the:
    GDP of the United States.

    New goods and services are included in GDP, but second hand goods are not.
  8. Per capita GDP is:
    The dollar value of GDP divided by total population.

    Per capita GDP is an important measure of economic well-being.
  9. Which of the following countries had the highest average growth rate for per-capita GDP from 2000 to 2005?

    Some countries are experiencing phenomenal growth rates in living standards.
  10. The current U.S. economy is based primarily on the production of:

    Production in the U.S. economy is mostly directed toward services.
  11. Which of the following contains the two sectors whose percentage contribution to the GDP has declined since 1900?
    Farming and manufacturing

    Farming and manufacturing are less important in the overall economy today.
  12. Human capital is defined as the:
    Knowledge and skills workers possess.

    Human capital is an important factor of production that allows for greater productivity.
  13. Productivity:
    Rises when the ratio of output to input increases.

    The amount we can produce with our inputs in a given time frame is what productivity is measuring.
  14. The investment in human capital through education and training can result in:
    Greater productivity.

    Human and physical capital both increase the productivity of workers.
  15. The government establishes the rules of the game for economic transactions in order to:
    Legitimatize and enforce contracts.

    • Without guarantees from both buyer and seller as established in contracts, many market activities would cease to exist, thereby
    • harming the economy.
  16. The richest 20 percent of the families in the U.S. receive approximately ______ percent of total income.

    A great deal of income goes to the top fifth of families.
  17. The role of the government in establishing how private business can operate includes all of the following except:
    Providing raw materials to business.

    The government plays important roles to safeguard the rights of individuals and society at large.
  18. A nation's GDP is:
    C + I + G + (X - M)

    GDP is a measure of the total production of a nation and an important barometer of the economy's health.
  19. A nation's GDP can be calculated as:
    The total value added at all stages of production.

    The value added approach to calculating GDP measures how much of an increase in the market value occurs at each particular stage of production.
  20. Suppose Blu-Ray players cost consumers $300 and Blu-Ray discs cost consumers $30. What contribution does the production of 250 Blu-Ray players and 3000 Blu-Ray discs make to the GDP?

    The total production of each product multiplied by the price of each product, then added together is the value of GDP. In this example GDP is equal to $165,000. (300 × 250 + 30 × 3000)
  21. Which of the following statements is correct concerning GDP and GNP?
    GDP measures output within the nation's borders only.

    GDP includes production within the political borders, while GNP measures production by U.S. owned factors of production regardless of where they may be located.
  22. The GDP per capita is the most practical way to:
    Make international comparisons of the standard of living.

    We can compare the average GDP of country A with the GDP of country B to determine which country's citizens are relatively more prosperous.
  23. If GDP per capita was $38,545 in 2002 and the population was 275 million, the GDP would have been approximately:
    $10,600 billion.

    GDP equals GDP per capita multiplied by population. (38,545 × 275 = 10,599,875)
  24. Suppose a friend claims he is helping the economy by throwing trash on the street rather than in trash cans because the extra expenditures necessary to clean up the streets will increase GDP. Your friend is:
    Right. GDP will increase, ceteris paribus.

    Even spending on "bads" such as fixing your car technically causes GDP to rise.
  25. Which of the following would not be included in the calculation of GDP?
    Tips earned by a bartender who does not report it to the IRS

    Any income that is not reported from legal or illegal sources does not officially count in GDP.
  26. A furniture factory produces dining room sets. The lumber they purchase from the lumberyard is a/an:
    Intermediate good.

    Anything used in the production of a final good is considered an intermediate good.
  27. Value added is the:
    Increase in market value of a product that takes place at each stage of the production process.

    As goods move along the supply chain from scratch to final retail sale, value is added.
  28. If a farmer grows a head of cabbage with fertilizer costs of $0.10 and seed costs of $0.15 and sells it to a wholesaler for $0.55 the total value added by the farmer is:

    Value added is equal to the sale price less any explicit input prices required to produce the good.
  29. An increase in real GDP is known as:
    Economic growth.

    Economic growth measures how the economy is doing based on comparisons of Real GDP over time.
  30. Real GDP is the:
    Value of final output produced in a given period measured in constant prices.

    Real GDP allows us to express production while controlling for changes to the price level.
  31. Assume nominal GDP is $10,000 billion in period 1 and $15,000 billion in period 2. If prices in period 2 are twice as high as in period 1, real GDP in period 2 is:
    $7,500 measured in period 1 prices.

    Real GDP will be lower than nominal GDP if the price level is increasing faster than production is. Real GDP is equal to nominal GDP/price index × 100. (15000/200 × 100)
  32. Investment is the:
    Expenditure on new plant, equipment, and structures plus changes in business inventories.

    Businesses invest in the economy by increasing the amount of physical capital.
  33. The addition to the economy's capital stock can be found by:
    Subtracting depreciation from gross investment.

    Only if investment is large enough to replace all worn out capital is there a chance for the capital stock to grow.
  34. The economic definition of investment includes all of the following except:
    A retirement portfolio of stocks and bonds.

    In economics, the term "investment" does not describe how one chooses to allocate one's wealth among asset classes.
  35. Net exports are:
    The value of exports minus the value of imports.

    Net exports when positive increase GDP, but decrease it when negative.
  36. National income is a measure of:
    The income earned by the factors of production in producing GDP.

    National income is the flip side of national production.
  37. Goods produced for the purpose of producing other goods are known as:
    Investment goods.

    Investment goods build up a nation's ability to produce goods through an increase in the capital stock.
  38. People are not part of the labor force when they:
    Are old enough to work but choose not to work.

    Anyone not employed that is not actively searching for work is considered not in the labor force.
  39. Who participates in markets?
    Business firms, consumers, and government agencies

    Consumers, business firms, government agencies and foreigners participate in the marketplace.
  40. A factor market is any place where:
    Land, labor, or capital is bought and sold.

    A factor market is where the factors of production (land, labor, capital) are bought and sold.
  41. A market in which final goods and services are exchanged is a:
    Product market.

    A product market is where finished (final) goods and services are bought and sold.
  42. To be officially counted as unemployed, one must be:
    Actively seeking employment and currently not working.

    Not only is being without a job sufficient to be considered unemployed; one must also be actively seeking a job
  43. Suppose that in a population of 50 million persons, 40 million are in the labor force, 36 million are employed, 2 million are classified as unable to work, and 1 million are classified as unwilling to work. The unemployment rate is:
    10.0 percent.

    The number unemployed divided by the labor force yields the unemployment rate.
  44. Of the following reasons for unemployment, which will increase most because of a recession?
    Job losers

    Layoffs due to insufficient demand in the economy, also known as cyclical unemployment, leads to a greater amount of layoffs than during an economic expansion.
  45. Suppose there are 6 million unemployed workers actively seeking a job. After a period of time 1,500,000 of these workers become discouraged and no longer look for employment. If everything else remains constant the unemployment rate will:

    The official unemployment rate can mask actual unemployment.
  46. In terms of the game musical chairs, which of the following is a description of structural unemployment?
    There are enough chairs, but some are not the right size

    Structural unemployment does not go away; many times the worker will need to be retrained for a new job.
  47. In terms of the game musical chairs, which of the following is a description of cyclical unemployment?
    There are too few chairs

    Cyclical unemployment becomes a serious problem during recessions as companies downsize.
  48. Full employment in the U.S. economy means that:
    The economy has reached the lowest level of unemployment compatible with price stability.

    Employing more and more resources tends to drive up resource prices; full employment means reaching the point of full resource utilization consistent with price stability.
  49. If the price of Bluetooth headsets rises 12 percent during a year when the level of average prices rises 13 percent, the relative price of Bluetooth headsets:

    When the price of a good increases at a slower rate than the price level then the relative price of the good decreases.
  50. Inflation ________________ the purchasing power of money.

    Since inflation increases the prices of goods and services on average, it reduces the purchasing power of money.
  51. When the price of a product rises faster than the inflation rate:
    Real incomes of the users of that product fall.

    Because the income of consumers of the products whose price is rising faster than the inflation rate will not buy as many goods and services, the real income of the consumer will fall. At the same time, the real income of the sellers of that product rises.
  52. Which of the following groups benefit from a sudden increase in inflation?
    Borrowers who have loans at fixed interest rates

    When inflation increases, borrowers end up paying fixed interest loans with money that is worth less than what they borrowed.
  53. Which of the following is a likely macroeconomic consequence of inflation?

    Individuals will buy and hold items they think will go up in value with the rising price level.
  54. If the price level is falling, all of the following are true except:
    Borrowers are not affected.

    Borrowers are affected in that the debts they must repay are paid back with dollars worth more than they borrowed.
  55. In order to compute the real income of a household, the index that should be used is the:

    The CPI is used as the household purchases the goods and services that are included in the CPI's market basket.
  56. If consumers attempt to buy more goods than the economy can produce, the result is:
    Demand-pull inflation.

    • When excess demand causes the price level to rise, the result is demand-pull inflation, because it is the increase in demand that is
    • causing prices to rise.
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Study Guide Exam 1
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