### Businesses Investment- Homework Explanation (Principles of Macroeconomics)

From an economist’s perspective, which of the following would not be considered as investment spending?

additions to inventories at steel plant

building a new factory

purchase of shares in Wal Mart – Correct

the building of an apartment complex

Explanation: When most people hear the word investment, they think of savings, stocks, or bonds. But in macroeconomics investment refers to private spending on tools, plant and equipment used to produce future output. It also includes the building of a new home. Investment also includes purchases by businesses that add to their own inventories, and also counts products that are produced but not sold in the specific year.

If you wanted to compare economic well-being over time and across countries, the data you would use is:

per capita GDP

real GDP

inflation – Correct

real per capita GDP

Explanation: Per capita GDP allows us to compare the economic well-being across countries, but only during a particular year. Real GDP measures changes in output, adjusted for changes in prices over time. Countries with higher levels of real GDP from one time period to the next have grown economically. We therefore use real per capita GDP (real GDP divided by population) to see how economic well-being changes across countries over time.

Many goods and services are illegally sold or legally sold but not reported to the government. If we increased efforts to count those goods and services, GDP would _____________.

stay the same

rise – Correct

fall

Explanation: GDP would increase as a result of these efforts, because the value of these unreported goods and services are currently not being calculated in GDP. For example, many babysitters do not report their income from babysitting jobs. If there were a way to include all the earned income from babysitters in the United States, GDP would increase.

Also, any work that is unpaid, such as a family member caring for an older relative or a stay-at-home mom cooking meals for her family, is not counted in GDP, even though something of value is being produced. Efforts to count these goods and services would also increase GDP.

Suppose nominal GDP in 1967 was \$1 trillion and nominal GDP in 1977 was \$2 trillion, The 1967 and 1977 price indexes were 100 and 250 respectively. Based on these numbers

real GDP decreased over the ten years. – Correct

real GDP increased over the 10 years.

real GDP increased and then decreased.

real GDP remained constant.

Explanation:

For 1967, we divide \$1 trillion by 100, and then multiply by 100. Real GDP for 1967 is \$10 billion
For 1977, we divide \$2 trillion by 250, and then multiply by 100. Real GDP for 1977 is \$8 billion. Comparing the 2 years, we can see that Real GDP has decreased.

Suppose you build an engine and sell it to the local body shop for \$7,000. The shop puts the engine in a car and sells the car to a dealer for \$20,000. The dealer sells the car to a customer for \$35,000. Which of the following statements is true based on all of these transactions?

GDP increases by \$35,000Correct

GDP increases by \$52,000

GDP increases by \$15,000

Explanation: GDP increases by the value of the finished vehicle which is \$35,000. When you build the engine and sells it to the body shop. The mechanic has added a value of \$7,000. Then ,the body shop installs the engine into the car, and sells it to the dealer. The shop has added a value of \$13,0000(\$20,000-\$7,000). When the car is sold to the consumer for \$35,000, the value added by the dealer is \$15,000. This \$15,000 is the \$35,000 sticker price minus the \$20,000 value originally created by the mechanic and body shop. If we take these amounts and add them together, we get \$7,000+\$13,000+\$15,000=\$35,000. This is the same as the amount that GDP increased.

The table below shows nominal GDP and the price level in the two years 2005 and 2011.

GDP in 2011, measured in 2005 dollars was

\$17,036.

\$15,076.

\$13,342 – Correct

\$11,171.

Explanation: We can use Equation 6.3 to determine 2011 GDP in 2005 dollars.

Which component of GDP includes inventory changes?

consumption

investment – Correct

inventory changes are not included in GDP

government spending

Explanation: Investment also includes all purchases by businesses that add to their inventories. For example, in preparation for the Christmas buying season, an electronics retailer will order more TVs, cameras, and computers. GDP rises when business inventories increase. GDP is calculated this way because we want to measure output in the period it is produced. Investment in inventory is just one more way that firms spend today to increase output in the future.

Which of the following best describes the relationship between imports and exports? Import spending is _____________ GDP and export spending is _______________ GDP.

subtracted from; subtracted from

subtracted from; added to – Correct

Explanation: Since exports are produced in your country they are counted as production.  It doesn’t matter who buys them.  Imports are made elsewhere so you don’t count these as part of your country’s production.

Which of the following is true of gross domestic product?

It can give us guidance on the living standards of a nation.Correct

It only measures income.

It only measures output.

It measures price inflation.

Explanation: GDP provides some insight into living standards. If GDP goes up, living standards tend to rise as well.

Which of the following scenarios are not macroeconomic in nature?

The U.S. unemployment rate falls to 8.5% in December.

The central bank of the United States increased interest rates by 0.5%.

Microsoft is considering buying another firm to help it expand its social media presence. Correct

The GDP of France has fallen to an inflation adjusted low.

Explanation: When considering macroeconomics you need to look at the big picture.  If a scenario deals with firms, towns, or individuals, then you are dealing with microeconomic subjects.  When you move to the national level, now you’re talking big.  Topics that impact or reflect a nation are macroeconomic. Some of these topics include GDP, unemployment, and the central bank changing interest rates. Microsoft buying another firm to expand social media presence would be considered a microeconomic scenario.

Which of the following transactions, if they were included in the calculation of GDP, would not lead to an overstated GDP figure?

The purchase of a special fabric adhesive by a furniture company in North Carolina

Hiring a babysitter and paying her under the table. – Correct

Explanation: Paying a babysitter under the table, if included would actually boost GDP. Each of these transactions is either a used good—that is, produced in a prior year—or is an intermediate good. Therefore, their inclusion in GDP would overstate current GDP.

Which of the following would not be counted in the calculation of GDP?

Paying for a flight to Las Vegas.

Paying for a maid service to come clean your house.

Government spending on social security. – Correct

Explanation: Illegal activities, transfer payments, and services that are produced but not sold are not counted in GDP.

Not all spending is counted in the calculation of GDP. This is because some types of spending do not represent production.  This is the case with transfer payments like social security and welfare.  Other things don’t get counted because they are difficult to keep track of, especially if they are conducted in the underground economy—like your purchase of a counterfeit designer purse.  Additionally, when you do something for yourself, rather than paying for it, this non-market activity does not count in GDP.

You work for the Committee for Economic Evaluation in the small nation of Kinsdale. Your current job is to determine the country’s gross domestic product in the past year. Being a very small country, the people only produce three things, which are listed in the table below.

Based on the data in the table, what is the GDP for your country?

\$290,000 – Correct

\$25.50

\$120

\$45,000

\$200,000

Explanation: By multiplying the price and the quantity for each of the goods listed and adding those results together you obtain GDP for Kinsdale.

Bananas: 20,000 × \$1.50 = \$30,000
Hiking Boots: 10,000 × \$20.00 = \$200,000
Roses: 15,000 × \$4.00 = \$60,000
GDP = \$30,000 + \$200,000 + \$60,000 = \$290,000

Below is data on the natural rate of unemployment and actual unemployment.

The information provided above reflects an economy that is

healthy – Correct

Explanation: To determine the health of an economy, we can compare the actual rate of unemployment with the natural rate of unemployment. The natural rate is the typical rate of unemployment in a healthy, growing economy. Therefore, if actual unemployment equals the natural rate, the economy is healthy. If the actual rate of unemployment is lower than the natural rate, the economy is expanding past its long-run potential—eventually, unemployment will increase to the natural rate. If the actual rate of unemployment is higher than the natural rate, the economy is in a recession.

undergoing a temporary expansion

in a recession

Creative destruction would be associated with which of the following types of unemployment?

Frictional

Cyclical

Structural – Correct

Explanation: Creative destruction occurs when the introduction of new products and technologies leads to the end of other industries and jobs. As some jobs become obsolete, the result is structural unemployment, which is caused by changes in the industrial makeup (structure) of the economy. Although structural unemployment can cause transitional problems, it is often a sign of a healthy, growing economy.

Data on the natural rate of unemployment and actual employment are provided in the table below.

Based on these numbers, the amount of cyclical unemployment in the economy is

negative

zero

positive – Correct

Explanation: Cyclical unemployment occurs during recessions, when actual unemployment is higher than the natural rate. During temporary expansions, with unemployment below the natural rate, cyclical unemployment is negative. If the actual unemployment rate is higher than the natural rate, cyclical unemployment must be positive. If actual unemployment is below the natural rate, cyclical unemployment must be negative. If the rates are the same, cyclical unemployment is zero.

In January 2008, the U.S. unemployment rate dropped to 4.9%. However, employment also fell from the prior month. How could this have happened?

The labor force decreased – Correct

The population decreased.

The labor force increased.

The population increased.

Explanation: This is possible if some of the people who were employed or unemployed leave the labor force. Consider a simple economy with a labor force of 100 people, where 10 are unemployed and 90 are employed. Suppose 5 of the people who were employed lose their jobs and become unemployed, and the 10 previously unemployed workers get tired of looking for work and leave the labor force. Then, the final number in the labor force is 90, and 85 are employed and 5 are unemployed. Before the transition, we had an unemployment rate of 10%, and afterward the unemployment rate is 5.5%.

Question 5

/ 1 pts

In his song “Allentown,” Billy Joel sings about the demise of the steel and coal industry in Pennsylvania. In areas like Allentown and much of the Midwest, manufacturing was once the largest employer, but many of those jobs have disappeared as technology has changed. What type of unemployment is the song about?

Frictional

Cyclical

Structural – Correct

Explanation: The steel and coal industry closed down in Allentown, causing workers to seek new employment. They don’t necessarily have the skills to match new jobs, meaning this represents structural unemployment. The song “Allentown” expresses how difficult it is for small communities when people have to adjust to changes in the structure of an economy. The focus of the song is on structural unemployment, which arises from factories closing in the town. Because the whole town was dependent on the factories, which were the biggest employers, after they closed, there were far fewer job opportunities for people in the community. Thus, Billy Joel sings about needing to find a new place to live. Structural unemployment may be a sign of a growing and dynamic economy, but it causes real pain for people who are caught in the middle of a dying industry.

Using the data provided in the table above, calculate the labor force participation rate is

5%

95%

5.5%

90% – Correct

Explanation: The labor force participation rate is calculated by dividing the total number of people in the labor force by the total population, and multiplying by 100 to obtain a percentage figure. Using the data provided in the table, the labor force participation rate = (36,000 / 40,000) × 100 = 90%.

Refer to the table below. If 4 million of those who are currently unemployed become discouraged workers, the unemployment rate will _______________.

increase to 6.7%

increase to 9.3%

decrease to 6.7% – Correct

remain unchanged

decrease to 9.3%

Explanation:The formula for the unemployment rate:

To calculate the unemployment rate before workers become discouraged, begin by calculating the number of employed workers. Looking at the table, we see that the number employed is equal to part-time workers plus full-time workers = 27 + 113 = 140. The question tells you that 14 million people are looking for work. They will be counted as unemployed until they become discouraged workers. Therefore, the previous labor force = 140 + 14 = 154, and the unemployment rate before workers become discouraged = (14 ÷ 154) x 100 = 9.1%.

To calculate the current unemployment rate, begin by considering the 4 million people who become discouraged, stop looking for jobs, and drop out of the labor force. When we account for the discouraged workers, the number of unemployed = 14 million – 4 million = 10 million. The new labor force = 140 + 10 = 150. Therefore, the new unemployment rate = (10 ÷ 150) x 100 = 6.7%. Thus we can see that the unemployment rate decreases to 6.7%.

Which of the following best explains why the United States has shifted from an agricultural economy to a service-based economy?

People have started to value the output of the service sector more than that of the agricultural sector.

Changes in the nature of agricultural production mean that fewer farm workers are needed. – Correct

The population of the United States has moved from rural to urban locations.

Outsourcing agricultural production means fewer jobs in the farm sector.

Explanation: The answer that best exemplifies the change from agriculture to service accounts for creative destruction—the introduction of new products and technologies that lead to the end of other industries and jobs. Changes in the production process allow farmers to produce much more food with far fewer workers.

Which of the following people would be considered unemployed?

A part-time teacher is only able to work two days a week, even though he would like a full-time job.

A college graduate spends the summer after graduation touring Europe before starting a job search.

An automobile worker becomes discouraged about the prospects for future employment and decides to quit looking for work.

A 17-year-old offers to pet-sit, but no one hires her. – Correct

Explanation: To be considered unemployed, a person must be part of the labor force and searching for a job without success. The pet-sitter is looking but no one will hire her.

Which of the following situations would increase the labor force participation rate?

more people going back to school full time

the government increasing the retirement age – Correct

more people filing for disability

more people deciding to stay at home to look after their children.

Explanation;

If the retirement age increases, this increases the amount of people in the labor force. If more workers file for disability, this means that they leave the labor force, and this would lower the labor force participation rate. The same applies to more people going back to school full time and more people becoming stay at home parents.

Which of the following situations would not be considered frictional unemployment?

A worker in a textile factory loses her job when manufacturing is mechanized. There are no other factories looking to hire someone with her skillset. – Correct

A software development firm finds the perfect employee, but waits to hire her because government regulations require them to consider other candidates before they make an offer.

A worker with ten years of experience in finance gets laid off. He has rejected three job offers because they are below his skill level.

Explanation; Frictional unemployment occurs because of delays in matching workers to jobs. Delays happen because of a lack of information or because of government policies. Frictional unemployment also occurs when workers wait to find better opportunities. The worker in the textile factory is an example of structural unemployment because the job loss was due to changes in technology.

Which of the following would be an example of someone experiencing cyclical unemployment?

someone who is working at a ski resort and is laid off when the winter season is over

someone who changes jobs to be closer to their family

landscapers laid off in response to drop in new housing construction during a recession – Correct

coal miners laid off due to EPA regulations that shut down coal fired power

Explanation;: Someone who changes jobs to be closer to their family would be considered frictional, because they would be in between jobs. The coal miners are structural due to changes in how the industry is run. The ski resort workers fall under seasonal. The landscapers are an example of cyclical because their unemployment is a result of a significant reduction in spending in the economy.

You have been hired to determine if unemployment is running too high. First you must determine the natural state of unemployment. You have been provided the data in the table below.

Using the data above, the natural rate of unemployment is

3%

4% – Correct

5%

2%

Explanation; There are three different types of unemployment, but only two are considered part of the natural rate—structural and frictional. Cyclical unemployment occurs when an economy is in recession, and is therefore not counted as part of the natural rate.

______ unemployment is the area in which policymakers can have their greatest impact.

Under

Structural

Cyclical – Correct

Frictional

Explanation; Cyclical unemployment, is caused by recessions, or economic downturns. This type of unemployment generates the greatest concern among economists and policymakers. It is the most serious type of unemployment because it means that jobs are not available for many people who want to work. Policymakers can pass legislation that will cut taxes and increase spending in the economy in order to lower cyclical unemployment. Structural unemployment would be better tackled by the states themselves since they can deal directly with the skills issues in their areas. Frictional unemployment is not that much of a concern to policymakers.

A loaf of bread cost \$0.18 in 1955 and the CPI was 26.8. The CPI in 2013 was 233. The cost of a loaf of bread in 1955 using 2013 dollars would be?

\$1.56 – Correct

\$0.02

\$1.80

\$156.00

Explanation;If the price level in the later time is greater than the price level in the earlier time, the conversion of the earlier price will make the earlier price greater than its original value.

If healthcare costs make up 8% of total consumer expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise?

9.2%

15.0%

1.2% – Correct

Using our formula for calculating the inflation rate, the rise in healthcare costs raised the overall price level by 1.2%.

(101.2 – 100) ÷ 100 × 100 = 1.2%.

23.0%

Explanation; Suppose the CPI in the first year is 100. If healthcare costs are 8% of total expenditures then they account for 8 of the 100 points, with the 92 other points falling in other categories. If healthcare prices rise by 15% in the second year, then those 8 points become 9.2 points. Since the prices of the other categories have not changed, the CPI now stands at 101.2, since 9.2 + 92 = 101.2.

Using our formula for calculating the inflation rate, the rise in healthcare costs raised the overall price level by 1.2%.

(101.2 – 100) ÷ 100 × 100 = 1.2%.

If your boss calls you into her office and offers you a promotion, which will include a 5% pay increase, how would you evaluate the value of your raise?

Very good, since the rate of inflation is 6%.

Bad, since the rate of inflation is 4%.

Bad, since the rate of inflation is 1%.

Very good, since the rate of inflation is 1% – Correct

Explanation;: When evaluating a raise, you need to account for the rate of inflation over the course of a year. If the inflation rate is greater than the percentage raise in your wage, then you are worse off, as your real income will fall. If the inflation rate is lower than the percentage raise in your wage, then you are better off, as your real income rises. Keep in mind that we want to examine real income and purchasing power as opposed to nominal income and purchasing power. If we think a raise of 5% is great when the inflation rate is higher than 5%, then we are suffering from money illusion.

In 1991, the Barenaked Ladies released their hit song “If I Had a Million Dollars.” How much money would the group need to have a million dollars’ worth of purchasing power in 2012 rounded to the nearest cent? Note that the consumer price index in 1991 was 136.2 and in 2012 it was 230.0.

\$592,173.91

\$1,000,000.00

\$1,688,693.10 – Correct

Explanation;\$1,688,693.10. Recall that to convert 1991 prices to 2012 prices we need to multiply the old price by the ratio of the CPIs. \$1,000,000 x (230.0 / 136.2) = \$1,688,693.10.

Let’s say you plan to retire 40 years from now, and you decide you could live on \$40,000 per year if you retired today. If the average annual inflation rate is 3% between now and your retirement date, how much money per year would you need to have saved?

\$41,200

\$120,000

\$130,400 – Correct

Explanation; For this question, you would need to know how many future dollars match today’s dollar. By using the bar chart in the Economics for Life box we can determine the equivalent of \$1 in 40 years. The x-axis tells you that, at an inflation rate of 3%, you would need \$3.26 (in 40 years) to match today’s \$1. To have enough savings to supply you with the equivalent of \$40,000 per year at 3% average inflation rate: take 40,000 × \$3.26, or \$130,400 per year, just to keep pace with inflation.

Suppose the prices of homes go up by 10 % and the prices of concert tickets rise by 20%, which will have the larger impact on the CPI?

the change in concert ticket prices

they will both have the same impact

the change in house prices – Correct

there is not enough information to make a decision.

Explanation;: The average consumer spends a much larger portion of their income on housing as compared to concert tickets, so the increase in the price of homes will have a larger impact on the CPI.

Suppose you sign a two- year job contract with Wells Fargo stipulating that you will receive an annual salary of \$93,500 plus an additional 2% over that in the second year to account for expected inflation. Based on this scenario, which of the following statements is true?

If the inflation rate turns out to be 3% rather than 2%, you will be worse off. – Correct

If the inflation rate turns out to be 1% rather than 2%, you  will be worse off.

If the inflation rate turns out to be 3% rather than 2%, Wells Fargo will be worse off.

Explanation; If inflation 3 percent turns out to be greater than your salary, increase, 2%, then you the worker, will suffer because your salary will not allow you to afford the same basket of goods and services that you bought the previous year. If inflation, 1% turns out to be lower than your salary increase, then Wells Fargo is worse off. In a case like this the price at which a firm must pay their employee rose by more than the prices at which they could sell their goods.

The Bureau of Labor Statistics reported the consumer price index as 211.4 in December 2007, and 231.1 in December 2012. By what percentage did the index increase from the end of 2007 to the end of 2012 (rounded to one decimal place)?

9.0%

19.7%

0.09%

9.3% – Correct

Explanation; In December 2012, the CPI stood at 231.1, up from 211.4 in December 2007. This is a 9.3% increase: (231.1 – 211.4) ÷ 211.4 × 100 = 9.3.

The equation of exchange is helpful for determining the effect of money supply changes on the price level. Using this concept, which of the following statements is true?

Real GDP increases by 3%, velocity does not change, and the money supply grows by 10%. The implied rate of inflation would be 13%

Real GDP grows at 3% and inflation is equal to 2%, and with no change in velocity, there is no change in the money supply.

Real GDP falls by 3% and there is no inflation, but the money supply grew by 5%.Therefore the change in velocity would be negative 8 percent – Correct

The equation of exchange in rates of growth is %ΔM + %ΔV ≈ %ΔP + %ΔY

If real gdp grows at 3% and inflation is equal to 2%, with no change in velocity we would have the following %ΔM + 0 ≈ 2% + 3%. Thus %ΔM ≈ 5%. If real gdp falls by 3 percent with no inflation, and the money supply grows by 5 percent, then 5% + %ΔV ≈ 0 + -3%. So the %ΔV ≈ -8%.

If real GDP increases by 3 percent, with no change in velocity, and money supply grows by 10%, then 10% + 0 ≈ %ΔP + 3%, so%ΔP ≈ 7%.

The equation of exchange in rates of growth is %ΔM + %ΔV ≈ %ΔP + %ΔY

If real gdp grows at 3% and inflation is equal to 2%, with no change in velocity we would have the following %ΔM + 0 ≈ 2% + 3%. Thus %ΔM ≈ 5%. If real gdp falls by 3 percent with no inflation, and the money supply grows by 5 percent, then 5% + %ΔV ≈ 0 + -3%. So the %ΔV ≈ -8%.

If real GDP increases by 3 percent, with no change in velocity, and money supply grows by 10%, then 10% + 0 ≈ %ΔP + 3%, so%ΔP ≈ 7%.

The table shown here gives a cost-of-living index for 14 different cities. If you are living and working in Phoenix and earning \$100,700 per year, to have the same standard of living in Manhattan you would need

\$100,700

\$116,000

\$116

\$216,700 – Correct

Explanation; Using the information provided in the table, plug in the appropriate values. The cost of living index is 100.7 for Phoenix and 216.7 for Manhattan. In this case, you just need to multiply each index by 1,000: a salary of \$100,700 in Phoenix is equal to a salary of \$216,700 in Manhattan. Your nominal wage might increase significantly, but your real wage will not; it would take \$216,700 per year in Manhattan to maintain the same standard of living you enjoyed in Phoenix.

Which of the following statements are NOT true about inflation?

It occurs when the overall level of prices increases.

When in the 2-4% range, it can be the sign of a weak economy – Correct

Some prices may fall even when most others rise.

Some prices affect consumers more than others.

When in the 2-4% range, it can be a sign of a healthy economy.

Explanation; Looking at the definition, and how we use CPI to measure inflation, we can see that inflation means we have an overall price increase, not just a price increase for one or two items. With an overall increase, the price of some items may even fall while others are rising; as long as the net impact is an increase, we have inflation. The basket of goods represents the typical urban family, so not every consumer buys every item in the basket. For example, the price of higher education increases more than the overall inflation rate, yet not everyone is attending and paying for college, so this increase will affect college students more than other members of the population. Or, if the price of hay is rapidly increasing, that is not included in the CPI calculation because it’s not purchased by the typical urban family. Deflation is a sign of an unhealthy economy, and hyperinflation leads to price confusion as well as other problems.

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