Macroeconomics is

• the study of economy-wide phenomena

Macroeconomics includes the study of topics such as:

• national output, the national unemployment rate, the rate of inflation, and the trade deficit

Statistics such as GDP, the unemployment rate, the rate of inflation, and the trade balance are

• macroeconomic, since they tell us something about the economy as a whole

Statistics such as individual stock prices, salaries of business executives, and prices of California wines are

• microeconomic, since they reflect situations in individual businesses and markets

Microeconomics is

• the study of how households and firms make decisions, and how they interact in markets

The goal of macroeconomics is

• to explain the economic changes that affect many households, firms, and markets at once

The basic tools of supply and demand are

• as central to macroeconomic analysis as they are to microeconomic analysis

The most closely watched economic statistic is

• GDP

The best single measure of the economic well-being of a society is believed to be

• Gross Domestic Product

Gross Domestic Product measures

• both a and b

For the economy as a whole

• Income must equal expenditure

In a simple circular-flow diagram, total income and total expenditure in an economy

• are always equal because every transaction has both a buyer and a seller

If you buy a new snowboard from the local sporting goods store, as a result of your purchase

• the increase in expenditure in the economy will equal the increase in income in the economy

A circular-flow diagram is used to describe

• the flow of income and expenditures in an economy

GDP in an economy consisting only of households and firms can be computed

• either by the method described in a or the method described in b

In the real economy, expenditure and income are always the same

• regardless of whether households spend all of their income or buy all of the goods and services produced in the economy

Which of the following statements best explains the equality between total income and total expenditure in an economy?

• Total income and total expenditure are equal in an economy because every transaction has both a buyer and a seller

Gross Domestic Product is defined as

• the market value of all final goods and services produced within a country in a given period of time

The real economy is more complicated than the one illustrated in a simple circular-flow diagram because

• households do not buy all goods and services produced in the economy, and households do not spend all of their income on goods and services

In order to include many different products in a summary or aggregate measure, gdp

• uses market prices

Which of the following would be the most useful way to measure GDP?

• use the value of the products measured by market price to add together the production of different kinds of goods and services

Market prices are used in adding together different kinds of products into a single, summary measure of economic activity because

• market prices measure what people are willing to pay for different goods; hence, they reflect the value of those goods.

The old adage, “You can’t compare apples and oranges,”

• does not apply to GDP because GDP does add together the values of many different products in order to get a single measure of economic activity

Which of the goods and services produced in the economy are included as part of GDP?

• all final goods and services bought and sold in legal markets plus the imputed value of some other legal goods and services that are not bought and sold in markets

The value of the housing service provided to individuals who live in housing they own themselves is included in GDP by

• estimating the rental value of the housing

An example of a non-market good or service that is included as an estimate in GDP is:

• the estimated rental value of owner occupied homes

Juanita rented a house in 1999, paying $500 each month. She could have continued renting at $500 per month in 2000, but took the option of purchasing the house from the owner. She now makes a $650 per month mortgage payment. The housing service Juanita receives will be

• included in 2000 GDP at the rate of $500 per month

Goods and services produced and sold illegally

• are excluded from GDP

Chris lives in Utah, where gambling is illegal. Chris becomes a professional gambler, going to work each week in Idaho, where gambling is legal. In 2001, he earns $100,000 from his profession. What will be the effect of his earnings on GDP?

• GDP will increase by $100,000 because the income was earned legally

Chris has been a professional gambler in Idaho, where gambling is legal, for several years. He lives in Utah, however, and his wife Christa convinces him to start practicing his profession in Utah, where gambling is illegal. In 2002, Chris earns $100,000 gambling in Utah, and reports the income to the IRS as income from illegal sources. What will be the effect of Chris's earnings on 2002 GDP?

• GDP will be unaffected because the income was earned illegally

Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn 100 times as much as did Babe Ruth in 1931. However, prices have also risen since 1931. We can conclude that

• one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.

The statistic used to convert dollar amounts into meaningful measures of purchasing power is called

• the consumer price index

When the consumer price index rises, the typical family

• has to spend more dollars to maintain the same standard of living

The consumer price index is used to

• monitor changes in the cost of living

The term inflation is used to describe a situation in which

• the overall level of prices in the economy is increasing

When the overall level of prices in the economy is increasing, we say that the economy is experiencing