Question 1

In a circular flow model, the total expenditures on an economy's output of goods and services equal the value of total income.

Accepted Answer

The circular flow model is based on the idea that income flows from households to firms in exchange for goods and services, while spending flows from firms to households in exchange for income. Therefore, the total expenditures on an economy's output of goods and services should be equal to the total income generated from the sale of those goods and services.

Question 2

In the presence of externalities, the equilibrium prices of goods and services-the figures used in GDP calculations-reflect their true values to society.

Accepted Answer

In the presence of externalities, the equilibrium prices may not reflect the true values of goods and services to society, as these prices do not take into account the social costs or benefits associated with them. For example, if a factory pollutes a nearby river, the cost of this pollution is not reflected in the market price of the goods produced by the factory, but rather borne by society at large. In such cases, the market may overproduce goods with negative externalities and underproduce goods with positive externalities, leading to a misallocation of resources and a potential welfare loss.

Question 3

A technological advance may come in either the form of a product or a process innovation

Accepted Answer

That is correct. A technological advance can either be a product innovation (a new or improved product) or a process innovation (a new or improved way of producing a product or providing a service).

Question 4

Increases in the quality and quantity of an economy's resources have little effect on its potential output in the long run

Accepted Answer

Increases in the quality and quantity of an economy's resources can lead to increases in its potential output in the long run, as seen in countries with high rates of technological advancement and investments in education and infrastructure.

Question 5

Estimates of the size of the underground economy in the United States range from 45 to 60 percent.

Accepted Answer

While it is difficult to accurately measure the size of the underground economy, most estimates place it at less than 10% of GDP, with some suggesting it may be as low as 2-3%. Estimates of 45-60% are widely exaggerated.

Question 6

If the educational attainment of a nation's population increases, the economy's production possibilities curve shifts inward​

Accepted Answer

This statement is false. When the educational attainment of a nation's population increases, it actually shifts the economy's production possibilities curve outward because a more educated population can be more productive and innovative, leading to increased economic growth and development.

Question 7

Economic mobility

Accepted Answer

Economic mobility refers to the ability of individuals or households to move up or down in income or wealth levels over time. It is typically measured by looking at changes in real income or wealth levels over time. Therefore, option C is the most appropriate choice as it focuses on the growth in real variables of an economy which is one of the factors that influences economic mobility.

Question 8

Capital formation is a key component of economic growth.

Accepted Answer

Capital formation refers to the process of increasing the stock of physical and human capital in a country. This leads to increased productivity, higher wages, and overall economic growth. Therefore, it is a key component of economic growth.

Question 9

It is impossible to have sustained economic growth unless a country or a region has abundant natural resources to sustain the growth

Accepted Answer

While natural resources can certainly play a role in economic growth, sustained growth is not solely dependent on their abundance. Other factors such as investments in education, infrastructure, technology, and innovation can also drive sustainable economic growth. Furthermore, a country or region may have abundant natural resources but still struggle with economic growth due to issues such as corruption, political instability, or an unhealthy business environment. Therefore, it cannot be said that abundance of natural resources is necessary for sustained economic growth.

Question 10

Brazil has a relatively low income per capita because it has relatively few natural resources.

Accepted Answer

Brazil is actually rich in natural resources, including oil, iron ore, and agricultural land. The reason for the country's relatively low income per capita has more to do with economic policies, inequality, and other factors.

Question 11

Callie taking an unpaid leave for five days to enjoy a vacation with her family will be reflected as a debit item in the GDP accounts

Accepted Answer

Taking an unpaid leave for a vacation does not contribute to the production of goods and services in the economy, which is what Gross Domestic Product (GDP) measures, so it will not be reflected as a debit item. Only economic activities, such as production, consumption, and investment, are included in GDP calculations.

Question 12

Productivity growth is a major determinant of a country's standard of living​

Accepted Answer

Productivity growth refers to an increase in productivity, which means producing more output per unit of input. When productivity grows, a country can produce more goods and services per worker or per unit of capital, which can lead to higher incomes, lower prices, and a higher overall standard of living. Therefore, productivity growth is a major determinant of a country's standard of living.

Question 13

Generally, there is an inverse relationship between savings and long-term economic growth

Accepted Answer

The statement is actually false. Savings are necessary for long-term economic growth as they provide capital for investment in productive assets, infrastructure, and research and development which helps in increasing productivity, creating jobs, and boosting economic growth. The more savings there are, the more capital is available for investment, leading to greater economic growth in the long run.

Question 14

Economists generally define economic growth as an increase in the nominal income of the population.​

Accepted Answer

Economists define economic growth as an increase in the real Gross Domestic Product (GDP) of a country over time, not just the nominal income of the population. Real GDP takes into account inflation and provides a more accurate picture of the country's overall economic performance.

Question 15

Personal income includes income received in the form of transfer payments

Accepted Answer

Transfer payments, such as Social Security, welfare, and unemployment benefits, are included in personal income as they are received by individuals.

Question 16

The higher opportunity cost of obtaining an education in developing countries is one of the reasons that school enrollments are lower

Accepted Answer

In developing countries, the opportunity cost of obtaining an education is often higher due to factors such as poverty, lack of access to schools, and the need for children to work or care for their families. This can lead to lower school enrollments, as families may prioritize other needs over education.

Question 17

An increase in the quantity of labor always leads to economic growth

Accepted Answer

An increase in the quantity of labor alone does not always lead to economic growth. Other factors, such as capital, technology, and resources, also play a crucial role in determining economic growth. Additionally, if the increase in labor is not accompanied by corresponding increases in productivity, education, or skills, it may lead to a decrease in economic growth.

Question 18

Real GDP accurately reflects both the quantity and quality of goods and services.

Accepted Answer

Real GDP only reflects the quantity of goods and services produced, not the quality.

Question 19

Poor infrastructure is a major deterrent to economic growth.

Accepted Answer

Poor infrastructure, such as inadequate transportation, communication, and energy systems, can hinder the movement of goods and people, slow down business operations, and discourage investment. All of these factors can negatively impact economic growth. Therefore, it is true that poor infrastructure is a major deterrent to economic growth.

Question 20

Under the expenditure approach to GDP accounting, government purchases of goods and services include welfare payments

Accepted Answer

In the expenditure approach to GDP accounting, government purchases of goods and services include spending on items such as defense, education, and infrastructure, but do not include transfer payments like welfare, since these payments are not payments for goods or services.

Quiz 12: Economic Growth