ECO 230-05 Name ________________________

Fall 2002

Quiz II

Rusty Smith

Section I: Multiple Choice (1 point each) Choose the one best answer from the choices provided and place the letter corresponding to that answer in the space provided to the left of the question number.

1. Gross national product (GNP)

a. is a measure of the final market value of all goods and services produced by resources located within a nation minus the market value of all final goods and services produced by resources owned by residents of a nation during a given year.

b. is a measure of the final market value of all goods and services produced by resources located within a nation during a given year

c. is directly equivalent to net national product.

d. is a measure of the final market value of all goods and services produced by resources owned by a nation’s citizens during a given year.

2. The phase of the business cycle at which real gross domestic output is increasing IMMEDIATELY following recovery is called

a. the trough.

b. the peak.

c. expansion.

d. recession.

3. When stagflation occurs the unemployment rate and the price level .

a. increases; increases.

b. increases; decreases.

c. decreases; decreases.

d. decreases; increases.

4. Jimmie is considering two jobs. All he wants to do is have the greatest amount of purchasing power possible. He was offered a job in Orlando, were the cost of living index is 130, earning $39,000 per year. He was also offered a job in Santa Fe, where the cost of living index is 110, earning $35,200. Where should he choose to work?

a. Either job offers the same “real” wage.

b. He should work in Santa Fe.

c. He should work in Orlando.

d. He doesn’t have enough information to decide which job offers the higher “real” wage.

5. Which type of unemployment occurs when the unemployed have the desired job skills, there are jobs available, and the unemployment is not expected to be long lasting?

a. Cyclical

b. Frictional

c. Structural

d. Both “a” & “c”.

Section II Short Answer/Essay Use the information provided to completely answer the following questions. Points as indicated.

1. Answer parts "a" through "f" concerning unemployment statistics using the following information. The individual parts do not affect each other (forget part “c” ever happened when answering part “d” and part “e”, etc.). (6 points)

Adults

Institutionalized

Working

Retired

Not Working but

Seeking Work

Discouraged Workers

1,290

100

980

a. The unemployment rate is .

b. The labor force participation rate is .

c. If 20 of the discouraged workers started searching for jobs, the unemployment rate would equal .

d. If a liberal judge released 50 of the institutionalized people from prison and 25 of these people searched for jobs while 25 of them became discouraged workers, the labor force participation rate would be ______.

e. Fully explain how the treatment of discouraged workers affects the validity of unemployment statistics.

2. Use the following table to answer parts a through d. (8 points)

Product	Quantity	Price 2001	Price 2002	Price 2003
Doritos	15	$1.20	$1.40	$1.40
Milk	10	$2.00	$2.50	$2.25
Tacos	12	$0.75	$1.00	$1.25
Twinkies	6	$1.00	$0.75	$1.50

a) Assume the preceding is a representative market basket and calculate the price index for the following given years, with the base year in parenthesis.

2001 (Base=2002)-

2002 (Base=2002)-

2003 (Base=2002)-

b) What was the rate of inflation from 2001 to 2003?

c) If real income was $33,000 in 2003, what was nominal income in 2003?

d) Assume that real income was the same in 2001 as it was in 2003. If nominal income was $40,000 in 2001, what was nominal income in 2003?

e) List and explain two reasons why a price index such as the CPI will tend to overstate inflation.

3. Define the business cycle. Identify the five parts of the business cycle and briefly explain each of them. Also “draw” the business cycle and label an example of each “part”. (6 points)