Chapter 6 An Introduction to Macroeconomics A

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Macroeconomics is mostly focused on:
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the economy as a whole.
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The two topics of primary concern in macroeconomics are:
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short-run fluctuations in output and employment, and long-run economic growth.
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The business cycle depicts:
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short-run fluctuations in output and employment.
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The term “recession” describes a situation where:
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output and living standards decline.
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Which of the following is most closely related to recessions?
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negative growth in output
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Which of the following statements is most accurate about advanced economies?
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Economies experience a positive growth trend over the long run, but experience significant variability in the short run.
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Real GDP measures the:
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value of final goods and services produced within the borders of a country, corrected for price changes.
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If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP?
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nominal GDP would rise, but real GDP would be unchanged.
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Real GDP is preferred to nominal GDP as a measure of economic performance because:
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nominal GDP uses current prices and thus may over- or understate true changes in output.
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Harry’s Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for $10 each. This year Harry’s again produced 10,000 large pepperoni pizzas (identical to last year’s pizzas), but sold them for $12 each. Based on this information we can conclude that Harry’s production of large pepperoni pizzas:
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increased nominal GDP from last year, but real GDP was unaffected.
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Harry’s Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for $10 each. This year Harry’s again produced 10,000 large pepperoni pizzas (identical to last year’s pizzas), but sold them for $12 each. Based on this information we can conclude that Harry’s production of large pepperoni pizzas this year:
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increased nominal GDP by $20,000, but left real GDP unchanged.
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Why are high rates of unemployment of concern to economists?
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There is lost output that could have been produced if the unemployed had been working.
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Unemployment describes the condition where:
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a person cannot get a job, but is willing to work and is actively seeking work.
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Higher rates of unemployment are linked with:
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higher crime rates as the unemployed seek to replace lost income.
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Inflation is defined as:
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an increase in the overall level of prices.
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Why are economists concerned about inflation?
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Inflation lowers the standard of living for people whose income does not increase as fast as the price level.
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The three statistics that are the main focus for those measuring macroeconomic health are:
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real GDP, inflation, and unemployment.
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Modern economic growth refers to countries that have experienced an increase in:
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real output per person.
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Before the period of modern economic growth:
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rates of population growth virtually matched rates of output growth.
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In making international comparisons of living standards using GDP, which of the following is not adjusted for in the calculation?
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the quantity of resources available to the economy
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Which of the following countries would economists say definitively is achieving modern economic growth?
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Nigeria experiences a 2.7 percent increase in real GDP per person.
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Which of the following is used to measure directly the average standard of living across countries?
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GDP per person
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Savings are generated whenever:
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current income exceeds current spending.
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When economists refer to “investment,” they are describing a situation where:
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resources are devoted to increasing future output.
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Which of the following would an economist consider to be investment?
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Boeing building a new factory
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For an economy to increase investment, it must:
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increase saving.
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If an economy wants to increase its current level of investment, it must:
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sacrifice current consumption.
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Increased present saving:
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comes at the expense of reduced current consumption.
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Banks and other financial institutions:
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promote economic growth by helping to direct household saving to businesses that want to invest.
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Shocks to the economy occur:
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when expectations are unmet.
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Shocks to the economy occur when:
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actual economic events do not match what people expected.
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Demand shocks:
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refer to unexpected changes in the desires of households and businesses to buy goods and services.
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Which of the following is an example of a demand shock?
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Consumers become worried about job loss and buy fewer goods and services than expected.
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Supply shocks:
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occur when sellers face unexpected changes in the availability and/or prices of key inputs.
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Which of the following is an example of a supply shock?
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A dramatic increase in energy prices increases production costs for firms in the economy.
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When demand shocks lead to recessions, it is mainly due to:
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price inflexibility.
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Suppose that Techno TV produces LCD televisions. At a price of $2,000 per television, Techno determines that its optimal output is 3000 television sets per week. If prices are sticky and fears of a recession reduce demand for LCD televisions, we would expect Techno to:
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reduce output in the short run.
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The figure above depicts a situation where:
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prices are flexible, but output is constant.
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Refer to the figure above. Assuming this market is representative of the economy as a whole, this economy:
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is capable of always producing at its optimal capacity.
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Refer to the figure above. Assuming this market is representative of the economy as a whole, a positive demand shock will:
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raise the price level, but leave output unchanged.
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Refer to the figure above. Assuming this market is representative of the economy as a whole, a negative demand shock will:
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lower prices, but leave output unaffected.
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The figure above depicts a situation where:
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prices are sticky, but output is flexible.
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Refer to the figure above. Assuming this market is representative of the economy as a whole, this economy:
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faces fluctuating output levels whenever there is a demand shock.
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Refer to the figure above. Assuming this market is representative of the economy as a whole, a positive demand shock will:
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increase output, but leave prices unchanged.
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Refer to the figure above. Assuming this market is representative of the economy as a whole, a negative demand shock will most likely:
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increase unemployment.
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Refer to the above figures. Which figure(s) represent a situation where prices are flexible?
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A only.
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Refer to the above figures. Which figure(s) represent a situation where prices are sticky?
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B only.
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Refer to the above figures. Which figure(s) represent a situation where negative demand shocks can result in a recession?
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B only.
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Refer to the above figures. Which of the following events would most likely result in higher unemployment?
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A shift from D2 to D1 in Figure B.
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Refer to the above figures. Which of the following events would most likely result in inflation?
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A shift from D2 to D3 in Figure A.
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Refer to the above figures. Which figure(s) represent a situation where firms are likely to hold inventories to accommodate unexpected changes in demand?
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B only.
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Which of the following results from firms holding inventories?
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Firms can maintain production levels and adjust inventories in response to demand shocks.
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Kara’s Kittens typically produces and sells at its optimal (lowest per-unit cost) level of 30 scratching posts per week. Kara’s also maintains an inventory of 20 scratching posts. If prices are sticky and there is a positive demand shock this week resulting in demand for 40 scratching posts, we would expect Kara’s to:
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sell the additional scratching posts out of its inventory and rebuild the inventory later when a negative demand shock occurs.
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In situations of sticky prices and negative demand shocks we would expect firms to:
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build up inventories before reducing production.
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Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices?
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Firms respond to shorter term demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels.
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For which of the following goods or services are prices most sticky?
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Coin-operated laundry machines
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For which of the following goods or services are prices least sticky?
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Airlines tickets
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The average number of months between price changes for gasoline is:
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0.6
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Prices for airline tickets change on average about once per month. This would suggest that airline ticket prices are:
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relatively flexible
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Prices tend to be sticky because:
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firms are worried that frequent price changes would annoy consumers.
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Which of the following best explains why prices tend to be inflexible even when demand changes?
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Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals.
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Prices are particularly sticky:
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when there are widespread macroeconomic and monetary disturbances in the economy.
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Which of the following statements best describes price flexibility in the economy?
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Prices tend to be sticky in the short run, but become more flexible over time.
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Refer to the above figures. As the economy moves from the very short run to the longer run, we would expect:
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the representation of the economy to move from Figure B to Figure A.
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Refer to the above figures. In terms of representing the economy:
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Figure B represents the very short run, where prices are sticky, and Figure A represents the longer run.
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Refer to the above figures. If government policy can be used to affect the level of demand in the economy, these figures suggest that government policy:
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can affect the level of output in the very short run, when prices are stuck.
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The overall behavior of the economy:
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differs over time as prices become increasingly flexible in the months and years following a shock.
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(Consider This) What is the difference between financial investment and economic investment?
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Financial investment refers to the purchase of assets for financial gain; economic investment refers to the purchase of newly created capital goods.
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(Consider This) Which of the following is an example of economic investment?
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Nike buys a new machine that increases shoe production.
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(Consider This) Suppose that Toyota buys a factory previous owned by Chrysler Motors. Economists would:
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not consider this to be an economic investment because no new capital is created through the purchase.
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(Consider This) In 2008 and 2009, the United States experienced what has come to be known as the:
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Great Recession
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(Consider This) The U.S. recession which occurred in 2008 and 2009 represented a case where:
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prices were relatively sticky and most of the impact was on total output.
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(Last Word) Many economists believe that the widespread use of computerized inventory control systems:
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has reduced severity in the business cycle.
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(Last Word) Computerized inventory tracking has been credited with reducing the number and severity of recessions because these tracking systems:
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allow firms to react more quickly and subtly to negative demand shocks, and avoid the large output reductions that frequently result in higher unemployment.
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(Last Word) Which of the following statements is true about computerized inventory tracking systems and the severity of recessions?
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While these systems are credited with reducing business cycle severity prior to the recession of 2007-2009, some economists believe that they contributed to the suddenness and severity of the 2007-2009 recession.

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