chapter 2 mishkin (2)

8/10/2019 Chapter 2 Mishkin (2)

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Macreconomics: Policy and Practice(Mishkin)

Chapter 2 Measuring Macroeconomic Data

2.1 Measuring Economic Activity: National Income Accounting

1) There are no questions for this section.Answer:

2.2 Measuring !": The "ro#uction A$$roach

1) The fun#amental i#entity of national income accounting im$lies %%%%%%%%.A) E&$en#iture ' "ro#uction ( Income) E&$en#iture ' "ro#uction ' Income*) Income 'E&$en#iture + "ro#uction!) Income 'E&$en#iture, "ro#uctionE)None of the a-ove

Answer: To$ic: 2.1 Measuring !": The "ro#uction A$$roach

2) ho hel$s calculate !" in the /nite# 0tatesA) the ureau of Economic Analysis) the *ensus ureau*) the ureau of a-or 0tatistics!) all of the a-oveE) none of the a-oveAnswer: !To$ic: 2.1 Measuring !": The "ro#uction A$$roach

3) hich government entity calculates !" in the /nite# 0tates on a quarterly -asisA) the Treasury !e$artment) the *ommerce !e$artment*) the 4e#eral 5eserve!) all of the a-oveE) none of the a-oveAnswer: To$ic: 2.1 Measuring !": The "ro#uction A$$roach

6) The statistic most often use# -y economists to measure the value of economic activity is%%%%%%%%.A) !") the *"I*) la-or+force $artici$ation rate!) the nominal interest rateE) the real interest rateAnswer: ATo$ic: 2.1 Measuring !": The "ro#uction A$$roach

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*o$yright 7 2812 "earson E#ucation9 Inc.


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) The $ro#uction a$$roach to measuring !" requires %%%%%%%%.A) that the mar;et value of a given goo# is a reasona-le a$$ro&imation of its economic value) that all goo#s an# services -e a##e# u$ -efore assigning a mar;et value*) that no goo# or service ren#ere# outsi#e the mar;et -e inclu#e# in !"!) all of the a-ove

E) none of the a-oveAnswer: ATo$ic: 2.1 Measuring !": The "ro#uction A$$roach

) To avoi# #ou-le counting in the calculation of !"9 which ty$es of goo#s are ty$icallye&clu#e# from the calculationA) interme#iate goo#s) ca$ital goo#s*) inventory goo#s!) nonmar;et goo#sE) value+a##e# goo#sAnswer: ATo$ic: 2.1 Measuring !": The "ro#uction A$$roach

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?) *a$ital goo#s are ty$ically $urchase# to %%%%%%%%. They get inclu#e# in !" %%%%%%%%.A) re$lace raw materials@ in the year they are $ro#uce#) ena-le the investor to $ro#uce other goo#s an# services@ in each year they are utilie#*) ena-le the investor to consume less in the current $erio#@ as they are use# u$ in the stages of$ro#uction

!) ena-le the investor to $ro#uce other goo#s an# services@ in the year they are $ro#uce#E) none of the a-oveAnswer: !To$ic: 2.1 Measuring !": The "ro#uction A$$roachAA*0: Analytical 0;ills

18) The #ifference -etween inventoriesan# inventory investmentis that ty$ically %%%%%%%%.A) the first one is a stoc; of unfinishe# or unsol# goo#s@ the secon# one is a flow that in#icates$ro#uctive activity) the first one #enotes the change in hol#ings of ca$ital@ the secon# one inclu#es most finalgoo#s*) the first one is measure# at the -eginning of the year@ the secon# one is measure# at the en# ofthe year!) all of the a-oveE) none of the a-oveAnswer: ATo$ic: 2.1 Measuring !": The "ro#uction A$$roachAA*0: Analytical 0;ills

11) In a two+goo# economy9 the $rice of vi#eo games is B68 an# the $rice of energy #rin;s is B2.If the annual out$ut of this economy is 188 vi#eo games an# 88 #rin;s9 the !" is %%%%%%%%.A) B898>8) B29288*) B9888!) B289288E) none of the a-oveAnswer: *To$ic: 2.1 Measuring !": The "ro#uction A$$roachAA*0: Analytical 0;ills

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12) *onsi#er a firm whose final out$ut Can# sales) in a $articular year has a value of B19288. To$ro#uce these goo#s9 the firm use# B88 worth of interme#iate goo#s it ha# $urchase# in$revious years $lus B288 worth of newly+$urchase# interme#iate goo#s. In the su-sequent year9this same firm again sells B19288 worth of final goo#s9 -ut in this year has $urchase# B=88 worthof interme#iate goo#s9 of which B188 is not use# in current $ro#uction -ut9 rather9 a##e# to the

firmDs inventory. 4or each of these two years9 calculate the value a##e# -y this firm. 4or each ofthese two years9 calculate the contri-ution of this firm to the economyDs !".Answer: alue a##e# in year one equals B19288 final goo#s minus B288 $urchase# interme#iatesequals B19888. alue a##e# in year two equals B19288 final goo#s minus B=88 $urchase#interme#iates equals B88. *ontri-ution to !" in year one equals B19888 value a##e# minusB88 #ecrease in inventory equals B88. *ontri-ution to !" in year two equals B88 valuea##e# $lus B188 inventory increase equals B


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2) hich of the following will -e counte# as an e&$en#iture in the measurement of !"CAssume that none of the transactions is conceale# from the relevant authorities.)A) the value of a use# automo-ile that remains unsol# on the #ealerDs lot) $urchase of a lam$ at a neigh-orhoo# garage sale*) $urchase9 using foo#stam$s9 of a loaf of -rea#

!) $ayment -y a $arent to her chil# for #oing househol# laun#ryE) $urchase of flour -y a -a;eryAnswer: *To$ic: 2.2 Measuring !": The E&$en#iture A$$roachAA*0: Analytical 0;ills

3) hich of the following will -e counte# as an investment e&$en#iture in the measurement of!"A) $urchase of a tractor -y a farmer from his neigh-or) $urchase of $referre# stoc; in A* *or$oration*) $urchase of a newly -uilt tractor -y a college fraternity for hay ri#es at their charity fair

!) $urchase of an a$artment in a newly+-uilt -uil#ingE) $urchase of newly -uilt com$uters -y a munici$al governmentAnswer: !To$ic: 2.2 Measuring !": The E&$en#iture A$$roachAA*0: Analytical 0;ills



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6) Assuming that the !" -rea;#own shown in Ta-le 2.1 is ty$ical of a given year in the /.0.we can say that %%%%%%%%.A) we s$en# twice as much on goo#s consum$tion as we #o on services) consum$tion of #ura-le goo#s is twice that of non#ura-les*) government $urchases is the largest main com$onent of !"!) all of the a-oveE) none of the a-oveAnswer: ETo$ic: 2.2 Measuring !": The E&$en#iture A$$roachAA*0: Analytical 0;ills

) Assuming that the !" -rea;#own shown in Ta-le 2.1 is ty$ical of a given year in the /.0.we can say that %%%%%%%%.A) we s$en# twice as much on services as we #o on goo#s consum$tion) consum$tion of non#ura-le goo#s is twice that of #ura-les*) $rivate investment is the smallest of the main #omestic com$onents of !"!) all of the a-oveE) none of the a-oveAnswer: !To$ic: 2.2 Measuring !": The E&$en#iture A$$roach

AA*0: Analytical 0;ills



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2.6 Measuring !": The Income A$$roach

1) The income a$$roach to measuring !" involves a##ing u$ the following %%%%%%%%.A) househol# income an# income generate# -y firms) $rivate s$en#ing9 ta& revenues an# government s$en#ing

*) transfer $ayments an# income ta&es!) interest income9 $rofits an# social security -enefitsE) wages9 -enefits an# interest incomeAnswer: ATo$ic: 2.3 Measuring !": The Income A$$roach

2) hich of the following is inclu#e# in the calculation of national incomeA) com$ensation of em$loyees) rental income*) in#irect -usiness ta&es!) all of the a-ove

E) none of the a-oveAnswer: !To$ic: 2.3 Measuring !": The Income A$$roach

3) In a country with unusually high ta& rates9 one might e&$ect that %%%%%%%%.A) !" might -e overstate# -ecause the government might avoi# running sur$luses) !" might -e un#erstate# -ecause its citiens might avoi# re$orting some of their income*) !" might -e overstate# -ecause the government might raise its outlays!) !" might -e un#erstate# -ecause its citiens might flee the countryE) after ta& income shoul# -e much higher than that of countries with lower ta& ratesAnswer: To$ic: 2.3 Measuring !": The Income A$$roachAA*0: 5eflective Thin;ing

6) Net national $ro#uct ( %%%%%%%%'%%%%%%%%.A) net interest@ gross #omestic $ro#uct) #e$reciation@ gross national $ro#uct*) #e$reciation@ $rivate #is$osa-le income!) $rivate #is$osa-le income@ gross national $ro#uctE) none of the a-oveAnswer: To$ic: 2.3 Measuring !": The Income A$$roachAA*0: Analytical 0;ills

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) hich of the following is inclu#e# in net government incomeA) social security -enefits) factor income*) ta&es!) all of the a-ove

E) none of the a-oveAnswer: *To$ic: 2.3 Measuring !": The Income A$$roachAA*0: Analytical 0;ills

) "rivate #is$osa-le income equals !" %%%%%%%%.A) minus cor$orate $rofits an# net factor income) $lus transfer $ayments an# net e&$orts*) $lus #e$reciation9 transfer $ayments9 an# interest $ayments on government #e-t!) $lus net factor income minus net government incomeE) none of the a-oveAnswer: !To$ic: 2.3 Measuring !": The Income A$$roach

?) The total income earne# -y resi#ents of an economy is ;nown asA) $rivate #is$osa-le income

) gross national $ro#uct*) gross #omestic $ro#uct!) national incomeE) none of the a-oveAnswer: To$ic: 2.3 Measuring !": The Income A$$roach

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18) 0u-traction of %%%%%%%% from ross National "ro#uct yiel#s ross !omestic "ro#uct.A) net factor income) #e$reciation*) factor income to the rest of the worl#!) net government income

E) none of the a-oveAnswer: ATo$ic: 2.3 Measuring !": The Income A$$roach

11) Accor#ing to the fun#amental i#entity of national income accounting9 income an# out$ut arei#entical. hy9 then9 is national income not equal to !"Answer: National income is net of #e$reciation9 while !" is a gross measure. National incomeis earne# -y resi#ents of the economy9 while !" measures the economic activity that occurs onnational territory. Thus9 income earne# -y resi#ents as a result of economic activity a-roa# isinclu#e# in national income9 -ut not in !". Income arising from #omestic $ro#uction that is$ai# to foreigners9 rather than resi#ents9 is inclu#e# in !"9 -ut not in national income.To$ic: 2.3 Measuring !": The Income A$$roachAA*0: 5eflective Thin;ing

2. 5eal versus Nominal !"

1) All income9 $ro#uction9 an# e&$en#iture varia-les that are measure# at current mar;et $ricesare referre# to as %%%%%%%%.A) real varia-les) nominal varia-les*) im$licit varia-les!) in#e& varia-lesE) none of the a-oveAnswer: To$ic: 2.6 5eal versus Nominal !"AA*0: Analytical 0;ills

2) An e&am$le of a nominal varia-le is %%%%%%%%.A) income measure# at current mar;et $rices) e&$en#itures in terms of the quantities of actual goo#s*) the chain weighte# measure of !"!) all of the a-oveE) none of the a-oveAnswer: A

To$ic: 2.6 5eal versus Nominal !"AA*0: Analytical 0;ills

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3) Nominal !" '%%%%%%%% where the $rice level is the %%%%%%%%.A) "rice level 5eal !"@ !" #eflator) "rice level 5eal !"@ *"I*) "rice level 5eal !"@ *"I!) "rice level 5eal !"@ !" #eflator

E) none of the a-oveAnswer: !To$ic: 2.6 5eal versus Nominal !"AA*0: Analytical 0;ills

6) 5eal !" '%%%%%%%% where the $rice level is the %%%%%%%%.A) Nominal !" "rice level@ !" #eflator) Nominal !" "rice level@ !" #eflator*) Nominal !" "rice level@ *"I!) Nominal !" "rice level@ *"IE) none of the a-oveAnswer: To$ic: 2.6 5eal versus Nominal !"AA*0: Analytical 0;ills

) E&am$les of #eflators are the %%%%%%%% an# %%%%%%%% #eflatorA) real@ nominal) $rivate #is$osa-le income@ gross national $ro#uct*) $ersonal consum$tion e&$en#iture@ gross #omestic $ro#uct!) gross #omestic $ro#uct@ rental incomeE) $rivate #is$osa-le income@ $ersonal consum$tion e&$en#itureAnswer: *To$ic: 2.6 5eal versus Nominal !"


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Real and Nominal GDP

video games energy drinks

year 1 price ! 2

year 1 output 1!! "!!

year 2 price ! 2#"year 2 output 12! ""!

year $ price " 2#"

year $ output 1"! %!!

=) ase# on the ta-le O5eal an# Nominal !"9O if year one is the -ase year9 then the real!" inyear two9 is %%%%%%%%.A) 888) 28*) ?88!) 28) 888*) =288!) =88

E) none of the a-oveAnswer: ETo$ic: 2.6 5eal versus Nominal !"AA*0: Analytical 0;ills

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3) The ureau of a-or 0tatistics C0) calculates the "*E #eflator %%%%%%%%.A) every month) every two months*) every three months!) every year

E) twice each monthAnswer: *To$ic: 2. Measuring Inflation

6) To com$ute the *"I9 the ureau of a-or 0tatistics C0) com$iles a O-as;et of goo#sO that%%%%%%%%@ each $rice in the in#e& is weighte# -y %%%%%%%%.A) are $ro#uce# in the /nite# 0tates@ an e&$en#iture survey) the average farmer $ro#uces@ how long it ta;es for the $articular goo# to reach the mar;et*) the average ur-an consumer -uys@ the quantity of the goo# that goes into the -as;et!) only mem-ers of congress $urchase@ a Olu&uryO scoreE) is ty$ical of consumers -elow the $overty line@ the $erceive# quality of the goo#

Answer: *To$ic: 2. Measuring InflationAA*0: Analytical 0;ills

) *om$uting the *"I is im$ortant -ecause it $rovi#es %%%%%%%%.A) a rough measure of the cost of living) it is use# as a -enchmar; in la-or negotiations*) government uses it to in#e& entitlements9 such as social security -enefits9 so that -eneficiaries#o not lose $urchasing $ower in $erio#s of inflation!) all of the a-oveE) none of the a-oveAnswer: !To$ic: 2. Measuring InflationAA*0: 5eflective Thin;ing


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=) In 1??9 the os;in commission i#entifie# the following $ro-lemCs) with the com$utation ofthe *"IA) it #oes not account for the fact that consumers can su-stitute away from $ro#ucts as they getmore e&$ensive) an increase in $rice coul# -e the result of quality im$rovements rather than an increase in the

cost of living*) it often #oes not reflect #ecreases in the cost of living that occur when new goo#s areintro#uce#!) all of the a-oveE) none of the a-oveAnswer: !To$ic: 2. Measuring InflationAA*0: 5eflective Thin;ing

>) The inflation rate ' %%%%%%%%.A) nominal !" + real !"

) growth rate in real !" P growth rate in nominal !"*) growth rate in real !" ( growth rate in nominal !"!) nominal !" real !"E) none of the a-oveAnswer: ETo$ic: 2. Measuring InflationAA*0: Analytical 0;ills

?) The inflation rate can -e o-taine# -y %%%%%%%%.A) #ivi#ing the nominal !" -y the !" #eflator) su-tracting the real !" from the nominal !"*) multi$lying the *"I -y !"!) su-tracting the growth in real !" from the growth in nominal !"E) none of the a-oveAnswer: !To$ic: 2. Measuring InflationAA*0: Analytical 0;ills

1!) 186.=

E) 11.>!) 133.



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&igure 2#"

2) Accor#ing to 4igure 2.9 the /nite# 0tates civilian labor forcein A$ril 2818 was %%%%%%%%.A) 16.> million) 13?. million*) 23=.6 million!) 222.1 millionE) none of the a-oveAnswer: ATo$ic: 2.< Measuring /nem$loyment

3) Accor#ing to 4igure 2.9 the /nite# 0tates civilian unemployment ratein A$ril 2818 was%%%%%%%%.A) .H*) ?.?H!)


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) Accor#ing to 4igure 2.9 the /nite# 0tates civilian employment ratioin A$ril 2818 was%%%%%%%%.A) 162.H) 36.>H*) >.>H

!)


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?) The unem$loyment rate that is ty$ically re$orte# in the me#ia is %%%%%%%%.A) -ase# on a survey from 189888 -usiness esta-lishments on wee;ly earnings9 num-er ofwor;ers an# hours wor;e#) com$ute# every three months*) -ase# on a survey of


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13) Assume that a high $ro$ortion of recent college gra#uates #eci#es to stay in school see;inga#vance# #egrees9 rather than confront the challenge of lan#ing a goo# o- in the mi#st ofgenerally high unem$loyment. hat is the #irect im$act of this -ehavior on Ca) the la-or force$artici$ation rate9 C-) the em$loyment ratio9 an# Cc) the unem$loyment rateAnswer: The #ecision to stay in school ma;es the la-or force smaller than it woul# -e otherwise9

so the la-or force $artici$ation rate is re#uce#. 4ewer em$loye# $ersons lowers the em$loymentratio. If all of these in#ivi#uals woul# have -een counte# as unem$loye#9 then the #ecline in thenum-er of unem$loye# equals the #ecrease in the la-or force. The $ercentage #ecrease in thenum-er of unem$loye# woul# then -e greater than the $ercentage #ecrease in the la-or force9 sothe unem$loyment rate is re#uce#. Kowever9 to the e&tent that some of those who stay in schoolwoul#9 otherwise9 have foun# a o-9 the sie of the #ecline in the unem$loyment rate is small.To$ic: 2.< Measuring /nem$loymentAA*0: 5eflective Thin;ing

2.> Measuring Interest 5ates

1) There are #ifferent interest rates associate# with many ty$es of securities. hich of thefollowing statements is correctA) they vary #e$en#ing on the liqui#ity of the security) they vary #e$en#ing on the ris; associate# with the security*) e&ce$t in very unusual times9 most interest rates move together!) all of the a-oveE) none of the a-oveAnswer: !To$ic: 2.= Measuring Interest 5atesAA*0: 5eflective Thin;ing

2) TheFederal Funds Rateis %%%%%%%%.A) the rate charge# on overnight loans of #e$osits Chel# -y the 4e#eral 5eserve) -etween -an;s) the rate charge# on cor$orate -an; loans to healthy O$rimeO -orrowers*) the rate charge# on /.0. Treasury -on#s -y the 4e#eral 5eserve!) the rate charge# on /.0 securities with maturities of less than a yearE) none of the a-oveAnswer: ATo$ic: 2.= Measuring Interest 5ates

3) The nominal interest rate %%%%%%%%.A) ma;es no allowance for inflation) is a $ercentage of the amount -orrowe#

*) is the rate that most -an;s a#vertise!) all of the a-oveE) none of the a-oveAnswer: !To$ic: 2.= Measuring Interest 5ates

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6) hich of the following is a goo# in#icator of short+term interest rates in internationalmar;etsA) $rime rate) Treasury -ill rate*) IJ5

!) 4e#eral fun#s rateE) none of the a-oveAnswer: *To$ic: 2.= Measuring Interest 5ates

) The real interest rate #iffers from the nominal rate in that %%%%%%%%.A) it more accurately re$resents the true cost of -orrowing) it varies negatively with changes in the rate of inflation*) it is the -etter in#icator of cre#it mar;et con#itions!) all of the a-oveE) none of the a-ove

Answer: !To$ic: 2.= Measuring Interest 5atesAA*0: 5eflective Thin;ing


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>) An increase in the expectedrate of inflation is most li;ely to cause an increasein %%%%%%%%.A) the ex postreal interest rate) the ex antereal interest rate*) the nominal interest rate!) the expectedreal interest rate

E) none of the a-oveAnswer: *To$ic: 2.= Measuring Interest 5atesAA*0: 5eflective Thin;ing

?) An increase in the actualrate of inflation is most li;ely to cause a decreasein %%%%%%%%.A) the ex postreal interest rate) the ex antereal interest rate*) the nominal interest rate!) the expectedreal interest rateE) none of the a-ove

Answer: ATo$ic: 2.= Measuring Interest 5atesAA*0: 5eflective Thin;ing

18) In the 1?=8s9 nominal interest rates in the /nite# 0tates were quite high9 while real rateswere e&tremely low. hich grou$ OwinsO in this circumstance9 len#ers or -orrowers hatmight e&$lain the willingness of the OlosersO to acce$t #isa#vantageous loan termsAnswer: orrowers OwinO when the real interest rate is low. The len#ersD OgenerosityO is mostly-ecause len#ing terms are -ase# on e&$ecte# inflation. If actual inflation turns out to -e higherthan e&$ecte#9 the real cost of -orrowing is lower than ha# -een e&$ecte#. Also9 most loans arema#e -y financial institutions that are in the -usiness of OsellingO money. hen e&$ecte#inflation is high9 some len#ers might try to attract -orrowers -y offering a nominal interest ratethat #oes not com$ensate fully for the e&$ecte# inflation. That is9 the len#er acce$ts a lower realinterest rate in or#er to increase its loan -usiness.To$ic: 2.= Measuring Interest 5atesAA*0: 5eflective Thin;ing

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11) A small -usiness owner has a line of cre#it from a -an; with a nominal interest rate of seven$ercent. 4or several years9 the $rice level has -een rising at an annual rate of two $ercent9 -ut theowner has ust rea# in the news$a$er that economists e&$ect ne&t yearDs inflation rate to -e four$ercent or more. Assume that this owner may either continue the line of cre#it at seven $ercent9or renegotiate to alter -oth the sie of the cre#it an# the interest rate. hat reason might there -e

for the owner to ;ee$ the cre#it terms as is hat argument might ustify changing the cre#itagreementAnswer: The e&$ecte# increase in the inflation rate from two $ercent to four $ercent means a#ecrease in the real interest rate from five $ercent to three $ercent. The e&isting terms of the lineof cre#it have -ecome more favora-le to the -orrower. 0ince the -an;Ds loan officers are aware ofthe change in e&$ecte# inflation9 renegotiation of the agreement must mean an increase in thenominal interest rate. Nonetheless9 the -an; might consi#er a new nominal interest ratesomewhat lower than nine $ercent9 so the real interest rate woul# -e somewhat lower than five$ercent. The -orrower will renegotiate only if she #esires9 an# the -an; is willing9 to increase thesie of the line of cre#it.To$ic: 2.= Measuring Interest 5ates

AA*0: 5eflective Thin;ing

chapter 2 mishkin (2)

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