ECON Drexel University Summer 2008 Assignment 1. Due date: July 8, 2008

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1 ECON Drexel University Summer 2008 Assignment 1 Due date: July 8, 2008 Instructor: Yuan Yuan Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (40 points, 2 points each) ANSWER SHEET: 1) 11) 2) 12) 3) 13) 4) 14) 5) 15) 6) 16) 7) 17) 8) 18) 9) 19) 10) 20) 1) Suppose you purchased in 2006 a house built in Which of the following would be included in gross domestic product for 2006? A) the value of the house in 2006 B) the value of the house in 2000 C) the value of the services of the real estate agent D) the value of the house in 2006 minus depreciation 1) 2) Value added equals the market price of the firm's product minus A) the price of intermediate goods. B) the price of all factors of production. C) wages and salaries. D) depreciation on plant and equipment. 2) 3) Which of the following would be directly counted in GDP in 2007? A) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a farm house built in 1950 B) kitchen cabinets purchased from Home Depot in 2007 to be installed in a house built in 1997 C) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a brand new country-style home. D) None of the above 3) 1

2 4) The real GDP of the U.S. in 2006 was approximately $13 trillion. This means that A) total spending in 2006 was around $13 trillion. B) the value of output in 2006 was around $13 trillion. C) total income in 2006 was around $13 trillion. D) all of the above are true. 4) 5) In 2007, Kendall Ford, an automobile dealership, spends $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $500,000 on Ford Motor company stock. Unsold cars and trucks were valued at $600,000 on January 1, 2007 and unsold cars and trucks were valued at $900,000 on December 31, What is Kendall Ford's total investment spending in 2007? A) $322,000 B) $1,422,000 C) $822,000 D) $522,000 5) Table 7-5 Stage of Production Seller Buyer Price (Dollars) 1 Steel Mill Auto Manufacturer $10,000 2 Auto Manufacturer Auto Dealer 18,000 3 Auto Dealer Consumer 25,000 Consider the table above showing three stages of production of an automobile. 6) Refer to Table 7-5. The value of each automobile in gross domestic product equals A) $15,000. B) $18,000. C) $53,000. D) $25,000. 6) 7) Increases in real GDP would overstate the increase in the well-being of a country over time if, over that time period, the A) price level increased. B) crime rate decreased. C) amount of pollution decreased. D) average hours worked per week increased. 7) 8) If the quantity of goods and services produced in the economy decreases A) it may be possible for nominal GDP to increase. B) nominal GDP would certainly increase. C) it may be possible for real GDP to increase. D) real GDP would certainly increase. 8) 9) Suppose that nominal GDP in 2005 was less than real GDP in Given this information, we know for certain that A) the price level in 2005 was less than the price level in the base year. B) real GDP in 2005 was less than real GDP in the base year. C) real GDP in 2005 was greater than real GDP in the base year. D) the price level in 2005 was greater than the price level in the base year. 9) 10) If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be A) greater than 100. B) less than 100. C) equal to 100. D) less than 0. 10) 2

3 11) The output of Mexican citizens who work in Texas would be included in the A) gross national product of the United States. B) net national product of the United States. C) gross national product of Mexico. D) gross domestic product of Mexico. 11) 12) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to overstate the true extent of joblessness? A) inflation B) discouraged workers C) unemployed persons falsely report themselves to be actively looking for a job D) counting people as employed who are working part time, although they would prefer to be working full time 12) 13) Suppose that homemakers are included as employed in the labor force statistics, rather than being counted as out of the labor force. This would A) increase the measured labor force participation rate. B) decrease the number of persons in the labor force. C) decrease the number of persons in the working-age population. D) increase the measured unemployment rate. 13) 14) Suppose the labor force stays constant, and the working population stays constant, but a greater number of persons who were unemployed become employed. The labor force participation rate will A) increase. B) not change in way that can be predicted. C) remain constant. D) decrease. 14) 15) If the growth rate of real GDP rises from 3% to 4%, the number of years required to double real GDP will decrease from A) 23.3 years to 17.5 years. B) 23.3 years to 20.6 years. C) 11.2 years to 10.8 years. D) 28.0 years to 21.0 years. 15) 16) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you the lender? An inflation rate A) equal to 0 percent. B) equal to 4 percent. C) equal to 6 percent. D) greater than 6 percent. 16) Table 8-4 Base Year (2000) 2006 Product Quantity Price Quantity Price Meat 100 $ $12 Potatoes 200 $2 180 $3 17) Refer to Table 8-4. Assume the market basket for the consumer price index has two products meat and potatoes with the following values in 2000 and 2006 for price and quantity: The Consumer Price Index for 2006 equals A) 129. B) 135. C) 125. D) ) 3

4 18) The increased generosity of unemployment insurance programs in Canada as compared to the U.S. should A) have no impact on the duration of unemployment in Canada. B) increase the duration of unemployment in Canada as compared to the U.S. C) decrease the duration of unemployment in Canada as compared to the U.S. D) raise the duration of unemployment in the U.S. 18) 19) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would A) equal 20%. B) decrease. C) increase. D) remain the same. 19) 20) If the federal government implements programs so that the unemployed are more quickly matched with jobs, then A) the natural rate of unemployment could either increase or decrease. B) the natural rate of unemployment will decrease. C) the natural rate of unemployment will not change. D) the natural rate of unemployment will increase. 20) SHORT ANSWER. Write your answer on a separate sheet of paper. 21) (10 points) Fill in the missing values in the table of data collected in the household survey for December, The working-age population, employment, unemployment, and labor force are measured in thousands. Show your work. Working-Age Population Employment Unemployment Unemployment Rate 5.4% Labor Force 135,113 Labor Force Participation Rate 67.0% Table Product Quantity Price Quantity Price Quantity Price MP3s 40 $ $ $260 Tacos 2, , , Coats ) (12 points) Refer to Table Consider the data above for a simple economy: Using 2000 as the base year, calculate nominal GDP, real GDP, the GDP deflator for 2005 and Calculate the growth rates of real GDP and nominal GDP from 2005 to Also using the GDP deflator to calculate the inflation rate from 2005 to Show your work. 4

5 23) (8 points) Refer to Table Consider the data above for a simple economy: Using 2000 as the base year, assume that the market basket for the consumer price index has all the three products MP3s, tacos and coats, calculate the CPI for 2005 and 2006 and use the CPI to calculate the inflation rate from 2005 to Is the inflation rate calculated from the CPI equal to that calculated from the GDP deflator? Why? Show your work. 24) (6 points) When potential GDP increases, is it necessarily the case that real GDP increases as well? Explain. 25) (9 points, 3 points each) In each of the following cases indicate if the population s well-being is higher, the same or lower than that indicated by the region s total GDP. Briefly explain your answer. a) In developing countries many rural families grow and consume their own vegetables. b) Crime and pollution are known to be higher around big cities. c) It has been discovered that 25% of GDP in a small town in country XXX comes from the production of weapons. 26) (10 points) In country ABC, the demand curve for labor is Ld= w, and the supply curve is Ls = w, where Ld denotes the quantity demanded for labor, Ls denotes the quantity supplied of labor and w is the wage rate. a) Calculate the equilibrium wage rate and employment in the labor market. b) Suppose that the minimum wage required by the government is 8, calculate the unemployment level (the surplus of workers) and the reduction of employment due to the minimum wage, and use a graph to show your results. 27) (5 points) Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During the next ten years, inflation falls. Are you a winner or a loser due to inflation? Explain why. 5