Chp 1: Macro Economics Flashcards

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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 produce 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:
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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 concerns 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 ass 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 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 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 generate 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 an 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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Refers 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 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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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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Airline tickets
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The average number of months between price changes for gasoline is:
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o.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 sticky in the short run, but become more flexible over time.
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The overall behavior of the economy:
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differs over time as prices become increasingly more 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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The business cycle is primarily concerned with changes in the level of overall prices over time. (T/F)
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False
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A sometimes short, sometimes extended period of declining output and living standards is referred to as a recession. (T/F)
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True
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The business cycle reflects both short-run fluctuations in output and long-run economic growth. (T/F)
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True
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Economists and policymakers are generally more concerned about nominal GDP than real GDP. (T/F)
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False
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Nominal GDP measures a nation’s output in current year prices. (T/F)
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True
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Any person without a job is considered to be unemployed. (T/F)
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False
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Higher unemployment rates are linked with higher crime rates and higher rates of physical and mental illness. (T/F)
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True
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Inflation reduces the purchasing power of a person’s income and savings. (T/F)
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True
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In 2007, unemployment rates in the United States exceeded the rates in Germany, India, and Poland. (T/F)
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False
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In 2008-2009, the U.S. economy lost 8 million jobs and saw the unemployment rate rise from 4.6 percent to as high as 10.1 percent. (T/F)
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True
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Real GDP measures the change in the price level over time. (T/F)
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True
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Modern economic growth refers to any situation where a nation’s output increases. (T/F)
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False
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In order to achieve modern economic growth, a nation’s output must grow faster than its population. (T/F)
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True
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A nation that realizes a 3 percent increase in its output per person is experiencing modern economic growth. (T/F)
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True
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Output per person has grown steadily since the beginning of the Roman Empire. (T/F)
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False
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China’s GDP per person in 2009 was less than one-tenth of U.S. GDP per person in the same year. (T/F)
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False
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Economists refer to purchases of stocks and bonds as “investment.” (T/F)
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False
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The amount of investment in an economy is ultimately limited by the amount of savings in that economy. (T/F)
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True
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Increasing investment in the present means forgoing future consumption. (T/F)
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False
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A nation that wants to invest in more newly created capital in the present must be willing to forgo present consumption. (T/F)
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True
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Banks and other financial institutions provide the link between savers and economic investors in the macroeconomy. (T/F)
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True
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Shocks occur when actual events do not match expectations. (T/F)
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True
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A demand shock occurs when large numbers of consumers unexpectedly reduce their purchases of goods and services. (T/F)
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True
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At the end of the summer driving season, the demand for gasoline typically declines. This is an example of a negative demand shock. (T/F)
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False
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Demand shocks may be positive or negative. (T/F)
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True
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“Supply shocks” occur any time there is a change in the supply of goods and services. (T/F)
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False
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Economists believe that most short-run fluctuations in output are the result of supply shocks. (T/F)
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False
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Demand shocks cause problems in the macroeconomy primarily because prices are sticky. (T/F)
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True
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In the very short run, demand shocks will tend to change the level of output but have little effect on prices. (T/F)
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True
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In the very short run, firms tend to respond to demand shocks by changing their prices. (T/F)
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False
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Negative demand shocks have a more significant impact on output and employment when prices are flexible. (T/F)
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False
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In the short run, firms are more likely to respond to demand shocks by altering inventory levels than by changing how much they produce. (T/F)
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True
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Milk prices tend to be stickier than gasoline prices. (T/F)
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True
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Prices tend to be stickier in the shorter run than in the longer run. (T/F)
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True
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Prices tend to be sticky partially because sellers know that consumers prefer stable prices. (T/F)
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True
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Prices tend to be more flexible when there are only two or three rival firms rather than a large number of sellers in the market. (T/F)
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False
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The “sticky price” model is the only one used by macroeconomists. (T/F)
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False
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(Consider This) The term “economic investment” refers only to money spent purchasing newly created capital goods such as factories, tools, and warehouses. (T/F)
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True
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(Consider This) If a farmer purchases 10 acres of farmland from a neighboring farmer, this would be considered an economic investment. (T/F)
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False
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(Consider This) If Ford Motor Company purchases factory equipment previously used by General Motors, this would be considered an economic investment. (T/F)
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False
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Short-run fluctuations in output and employment are referred to as:
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Business cycles
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The situation where output and living standards decline is referred to as:
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A recessions
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The major statistics that provide macroeconomists a picture of the health of an economy include the following, EXCEPT:
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Prices of oil and gasoline
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Real gross domestic product:
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Measures the value of the final goods and services produces within the borders of a given country during a given time period corrected for changing prices
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Real gross domestic product:
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Will increase if there is an increase in the level of output
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Nominal gross domestic product:
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Measures the value of final goods and services produced within the borders of a given country during a given time period using current prices.
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Nominal gross domestic product:
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Can change when there is a change in either output or the price level
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Suppose that an economy’s output does not change from one year to the next, but the price level doubles. What happens to real GDP?
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Real GDP doesn’t change
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Suppose that an economy’s output does not change from one year to the next, but the price level doubles. What happens to nominal GDP?
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Nominal GDP doubles
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Suppose a small economy produces only HD TV sets. In year 1, 100,000 sets are produced and sold at a price of $1,200 each. In year 2, 100,000 sets are produced and sold at a price of $1,000 each. As a result:
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Nominal GDP decreases, while real GDP remains constant
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Suppose a small economy produces only MP3 players. In year 1, 10,000 MP3 players are produced and sold at a price of $100 each. In year 2, 12,000 MP3 players are produced and sold at a price of $80 each. Which of the following statements is true?
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Real GDP increases while nominal GDP decreases
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Economists and policy makers are committed to encouraging a large and growing real GDP because
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More output means greater consumption opportunities
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Higher rates of unemployment:
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Indicate that society is not using a large portion of the talent and skill of its people
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High rates of unemployment are undesirable because they:
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Are associated with higher levels of crime and illness
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An increase in the overall level of prices is called:
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Inflation
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Inflation is troublesome to consumers because of the following effects, EXCEPT:
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Workers’ wages may be rising faster than the overall prices
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Which of the following is most likely to be indiction of higher unemployment?
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A decrease in real GDP
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Suppose a family’s income increases by 5% at the same time that inflation is 6%. Then:
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The family’s standard of living will fall
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If a family’s income increases by 5% at the same time that inflation is 3.5%, then the:
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Family will need to spend more in order to maintain its standard of living.
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Macroeconomic models help clarify important questions such as the following, EXCEPT:
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How will OPEC manipulate and maintain the price of crude oil in the world markets?
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Rapid and sustained economic growth of nations:
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Is a modern phenomenon
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The Industrial Revolution began in:
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England in the late 1700’s
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For many decades prior to the Industrial Revolution, the standards of living in England and China:
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Remained roughly constant
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In earlier centuries, the Roman and Chinese economies:
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expanded but output per person remained virtually stagnant
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Suppose the real GDP increase by 5% while the population of a country increases by 7%. Then
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Out put per person necessarily decreases
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Modern Economic Growth:
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Makes a country’s output per rise at a compounded rate
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Under modern economic growth, the annual average increase in output per person is
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Often not large, perhaps 2% per year.
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Before the late 1700’s, living standards in the richest part of the world were
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At most only two or three times higher than living standards in the poorest parts of the world
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Which of the following is not an adjustment made when comparing standards of living across countries?
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Adjusting for different unemployment rates across countries.
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Purchasing Power Parity refers to
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adjusting GDP figures for the fact that prices are much lower in some countries than in others
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In 2009, output per person in the U.S. was about
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$46,000 per year
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Which among the following countries had the highest GDP per person in 2009
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Canada
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Investment happens when:
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Resources are devoted towards increasing future output
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Savings:
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Occur when current spending is less than current incomes
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There is a trade-off between:
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current consumption and future consumption
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The amount of investment is ultimately limited by the amount of:
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Capital
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Which of the following statements if true?
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Economic investment refers to the creation and expansion of business enterprises
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Which of the following is the best example of financial investment?
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A retiree purchases Google stock
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Which of the following is the best example of economic investment?
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Apple builds a new plant to manufacture iPads
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Which of the following is the best example of investment as defined by economists?
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A restaurant owner buys a freezer to store ingredients for the restaurant meals
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One principle of economic growth is the notion that, to raise living standards over time, an economy must:
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Devote some portion of its current output to increasing its future output
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Which of the following is the principle source of savings in an economy?
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Households
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Savings are transferred from savers to borrowers through the following intermediaries, EXCEPT:
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Real Estate Brokers
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Decisions about savings and investment are:
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complicated by the fact that the future is uncertain
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Increased optimism about the future will lead to:
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More current investment and more future comsumption
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Situations in which firms expect one thing to happen but then something else happens are called:
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Shocks
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In economics, the work “Shocks” refers to:
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Situations were firms’ expectations are not met
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Sharply rising oil prices are most likely to lead to a:
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negative supply shock
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If consumers become pessimistic, the economy is likely to experience a:
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Negative demand shock
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An increase in worker productivity will lead to a:
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Positive supply shock
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The term “Shock”:
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Does not tell us whether what has happened is unexpectedly bad or unexpectedly good
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What impact will a negative demand shock have on the main measures of economic performance?
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Real GDP will decrease, inflation will decrease, and unemployment will increase
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What impact will a negative supply shock have on the main measures of economic performance?
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Real GDP will decrease, inflation will increase, and unemployment will increase
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Economists believe that most short-run fluctuations:
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Are the results of demand shocks
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If prices are “sticky” in the short run, then:
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The economy will respond to demand shocks primarily through changes in output and employment
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If prices are inflexible, then a negative demand shock will lead to:
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a short-run decrease in real GDP
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Because prices are sticky, positive demand shock will lead to:
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a decrease in unemployment
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Business cycle fluctuations typically arise because:
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The actual demand for goods and services ends up being more or less than what firms were expecting
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Which of the following statements is true?
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If prices were fully flexible, there would be no short-run economic fluctuations
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If prices of goods and services quickly adjust to demand shocks, then
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Firms would find it easier to produce at their optimal output rates
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If prices of goods and services are free to quickly adjust, then:
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A negative demand shock would have no short-run effect on unemployment
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If prices of goods and services are inflexible, then:
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A positive demand shock would lead to increased real GDP in the short-run
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Inventories:
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Tend to reduce the severity of short-run fluctuations
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Inventories rise when:
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Actual demand for output is less than expected
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Suppose that inventories are rising. We could expect that, in the future:
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Real GDP will likely decrease
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Suppose that inventories are falling. We could expect that, in the future:
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Unemployment will likely decrease
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Suppose that prices are sticky in the short-run. Which of the following best describes the economy’s response to a negative demand shock?
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Firms’ inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.
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Suppose that prices are sticky in the short-run. Which of the following best describes the economy’s response to a positive demand shock.
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Firms’ inventories will decrease, causing them to increase production. Ultimately, real GDP will increase, and unemployment will decrease.
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Which of the following markets is most likely to exhibit extremely flexible prices?
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The oil market
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For which of the following goods is the price least likely to be flexible?
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Newspapers
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Which of the following statements about price stickiness or flexibility is true?
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Prices of many raw materials are much more flexible than the prices of final goods and services
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Which of the following is NOT a factor that increases short-run price stickiness?
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A firm can lower its price without fear that rival firms ill also lower their prices
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Price wars:
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Occur when one firms lowers its price and rival firms react by lowering their prices
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Which of the following statements about price wars is true?
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Firms that have to deal with the possibility of price wars often have sticky prices.
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In macroeconomic models, prices are assumed to be completely inflexible in:
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The short-run only
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Firms that choose to use a fixed-price policy:
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Will tend to experience larger inventory changes than firms that follow a flexible-price policy
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Economists need different models of the economy because:
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The economy behaves differently depending on how much time has passes after a demand shock
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Many Economists believe that over several decades before the great recession occurred:
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Economic fluctuations have become much less severe because of the introduction of computerized inventory tracking systems
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The so-called Great Recession in the U.S. occurred in:
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2007-2009
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During the Great Recession, the U.S. car companies experienced a demand shock, and as it turned out:
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Production fell because prices were sticky
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Before computers, businesses counted their inventory so infrequently that changes in production needed to respond to changes in demand:
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were quite sharp
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Computerized inventory tracking has enabled businesses to do the following, EXCEPT:
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wait a longer period before adjusting production levels to changes in demand
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Business cycles refer to short term fluctuations in prices. (T/F)
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False
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Real GDP can change due to changes in the price level. (T/F)
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False
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If nominal GDP is rising faster than real GDP, then inflation must be occurring. (T/F)
answer

True
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If nominal GDP increases form one year to the next, then we know that the economy’s out has grown. (T/F)
answer

False
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Inflation refers to an increase in the overall level of prices. (T/F)
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True
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The Industrial Revolution began in England in the late 1700’s. (T/F)
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True
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Citizens living in the richest nations today have material standards of living that are on average more than 50 times higher than people living in the poorest countries. (T/F)
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True
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Savings are generate when current consumption is less than the current output. (T/F)
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True
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Buying 100 shares of Google stock would be an example of economic investment. (T/F)
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False
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Economists use the word investment to refer to the purchase of assets such as stocks, bonds, and real estate. (T/F)
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False
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Investment is ultimately limited by the amount of savings in the economy. (T/F)
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True
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The opportunity cost of investment is a reduction in future consumption. (T/F)
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False
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Businesses are the main economic investors, while households are the main savers. (T/F)
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True
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Economists believe that short0run fluctuations are the result of supply shocks. (T/F)
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False
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When prices are inflexible, the economy will respond to demand shocks through short run changes in output and unemployment. (T/F)
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True
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If expectations are always met, then firms would never contribute to any of the short-run fluctuations in employment and output that are observed in real-world economies. (T/F)
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True
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If the price of goods and services were flexible, then the economy could always produce at its optimal capacity. (T/F)
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True
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An unexpected negative demand shock would lead to a decrease in inventories. (T/F)
answer

False
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An unexpected negative demand shock would lead to a decrease in real GDP. (T/F)
answer

True
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Sticky prices could be the result of the firm being afraid of price wars. (T/F)
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True
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Price stickiness tends to moderate over time. (T/F)
answer

True
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Economists use different models of the economy because the economy behaves differently depending on how much times has passes after a demand shock. (T/F)
answer

True

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