Macro Test 2

question

Recurring upswings and downswings in an economy’s real GDP over time are called: A. recessions B. business cycles C. output yo-yos D. total product oscillations
answer

B. business cycles
question

In the United States, business cycles have occurred against a backdrop of a long-run trend of: A. declining unemployment B. stagnant productivity growth C. rising real GDP D.rising inflation
answer

C. rising real GDP
question

Most economists agree that the immediate determinate of the volume of output and employment is the: A. composition of consumer spending B. ratio of public goods to private goods production C.level of total spending D.size of the labor force
answer

C.level of total spending
question

As it relates to economic growth, the term for long-run trend refers to: A. the long-run increase in the relative importance of durable goods in the U.S. economy. B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years. C. fluctuations in business activity that average 40 months in duration. D. fluctuations in business activity that occur around Christmas, Easter, and the other major holidays.
answer

B. the long-term expansion or contraction of business activity that occurs over 50 to 100 years.
question

In which of the following industries or sectors of the economy will businesses cycle flu cations likely have the greets effect on output? A. military goods B. capital goods C. textile products D.agricultural commodities
answer

B. capital goods
question

The industries or sectors of the economy in which business cycle flu cations tend to affect output most are: A. military goods and capital goods B. services and nondurable consumer goods C. clothing and education D. capital goods and durable consumer goods
answer

D. capital goods and durable consumer goods
question

During a severe recession, we would expect output to fall the most in: A. the healthcare industry B. the clothing industry C.agriculture D. the construction industry
answer

D. the construction industry
question

The phase of the business cycle in which real GDP declines is called: A. the peak B. an expansion C. a recession D. the trough
answer

C. a recession
question

The phase of the business cycle in which real GDP is at a minimum is called: A. the peak B. a recession C. the trough D. the underside
answer

C. the trough
question

The production of durable good varies more than the production of nondurable goods because: A. durables purchases are nonpostponable B. durables purchases are postponable C. the producers of nondurables have monopoly power D. producers of durables are highly competitive
answer

B. durables purchases are postponable
question

A recession is defined as a period in which: A. cost-push inflation is present B. nominal domestic output falls C. demand-pull inflation is present D. real domestic output falls
answer

D. real domestic output falls
question

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates? A. expansion B. recession C. peak D.trough
answer

A. expansion
question

Which of the following statements is true about causes of business cycle fluctuations? A. economists all agree that supply shocks are the cause of most business cycle fluctuations B. economists all agree that productivity shocks are the cause of most business cycle changes C. economists all agree that monetary changes are primarily responsible for business cycle fluctuations D. there are wide range of theories as to the underlying cause of business cycle movements
answer

D. there are wide range of theories as to the underlying cause of business cycle movements
question

Which of the following is NOT seen by economists as an underlying cause of fluctuations? A. unexpected financial bubbles that eventually burst B. shocks to the money supply by the nation’s central bank C. supply shocks caused by major innovations D. all of these are identified as causes of business cycle changes
answer

D. all of these are identified as causes of business cycle changes
question

Most economists agree that the immediate cause of most business cycle variation is: A. an unexpected change in the productive of workers B. an unexpected change in the level of total spending C. the invention of new products D. the growth and subsequent bursting of finical bubbles
answer

B. an unexpected change in the level of total spending
question

An unexpected increase in spending will cause an increase in GDP: A. if prices are sticky B. if prices are fully flexible C. regardless of weather prices are sticky or fully flexible D. only if prices are stuck in the long term
answer

A. if prices are sticky
question

What is the primary reason that changes in total spending lead to cyclical changes in output and employment? A. government is unable to respond by changing the amount of money in circulation B. changes in total spending cause supply shocks that cause cyclical variation C. prices are sticky in the short run D. prices are flexible in the long run
answer

C. prices are sticky in the short run
question

Innovations such as the microchip and the Internet lead to business cycle variations because: A. they cause prices to be sticky B. significant innovations occur irregular and unexpectedly C. the central bank will often change the money supply in response. D. they cause prices to be flexible
answer

B. significant innovations occur irregularly and unexpectedly
question

Which of the following would most likely move to the economy into a recession in the short term? A. invention of a new product that most consumers want to buy B. innovations in management that enhance worker productivity C. the central bank printing less money than was anticipated D. congress passing a reduction in personal income tax rates
answer

C. the central bank printing less money than was anticipated
question

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Unemployed-7 Total Population-145 Employed-95 Discouraged Workers-3 Refer to the information above: The labor force of Scoob is: A. 95 million B. 102 million C. 105 million D. 145 million
answer

B. 102 million
question

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Unemployed-7 Total Population-145 Employed-95 Discouraged Workers-3 Refer to the above information. The unemployment rate in Scoob is: A. 2.5% B.3.2% C.5.0% D.6.9%
answer

D. 6.9%
question

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Unemployed-7 Total Population-145 Employed-95 Discouraged Workers-3 Refer to the above information. If the natural rate of unemployment in Scoob is 5 percent, then: A. structural unemployment is about 3% B. frictional unemployment is about 2% C. cyclical unemployment is about 2% D. hidden unemployment is about 5%
answer

C. cyclical unemployment is about 2%
question

The United States’ economy is considered to be at full employment when: A. about 405 percent of the total population is unemployed B. 90 percent of labor force is employed C. about 4-5 percent of the labor force is unemployed D. 100 percent of the labor force is employed
answer

c. about 4-5 percent of the labor force is unemployed
question

In the United States, the rate of unemployment is highest for: A. white teenagers B. African-American teenagers C. married women D. unmarried women
answer

B. African-American teenagers
question

Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching fora position in management. Kara presently is: A. cyclically unemployed B. structurally unemployed C. frictionally unemployed D. not a member of the labor force
answer

C. frictionally unemployed
question

According to the Bureau of Labor Statistics, to be officially unemployed a person must: A. be in the labor force B. be 21 years of age or older C. have lost a job D. be waiting to be called back from a layoff
answer

A. be in the labor force
question

The natural rate of unemployment is: A. higher than the full-employement rate of unemployment B. lower than the full-employment rate of unemployment C. that rate of unemployment occurring when the economy is at its potential output D. found by dividing goal unemployment by the size of the labor force
answer

C. the rate of unemployment occurring when the economy is at its potential output
question

The labor force includes: A. employed workers and persons who are officially unemployed B. employed workers, but excludes persons who are officially unemployed C. full-time workers, but excludes part-time workers D. permanent employees, but excludes temporary employees
answer

A. employed workers and persons who are officially unemployed
question

The unemployment rate of: A. women greatly exceeds that of men B. whites is roughly equal to that of African-Americans C. managerial and professional workers exceeds that of construction and extraction workers D. teenagers is much higher than that of adults
answer

D. teenagers is much higher than that of adults
question

Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is: A. unemployed B. employed C. not in the labor force D. in the labor force
answer

C. not in the labor force
question

If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the: A. frictional unemployment rate is 5 percent B. cyclical unemployment rate and the frictional unemployment rate together is 5 percent C. cyclical unemployment rate is 4 percent D. natural rate of unemployment will eventually increase
answer

C. cyclical unemployment rate is 4percent
question

Official unemployment statistics: A. understate unemployment because individuals receiving unemployment compensation are counted as employed B. understate unemployment because discouraged workers are not counted as unemployed C. include cyclical and structural unemployment, but not frictional unemployment D. overstate unemployment because workers who are involuntary working part time are counted as being employed
answer

B. understate unemployment because discouraged workers are not counted as unemployed
question

The presence of discouraged workers: A. increase the size of the labor force, but does not affect the unemployment rate B. reduces the size of the labor force, but does not affect the unemployment rate C. may cause the official unemployment rate to understate the true amount of unemployment D. may cause the official unemployment rate to overstate the true amount of unemployment
answer

C. may cause the official unemployment rate to understate the true amount of unemployment
question

Part- time workers are counted as: A. unemployed and therefore the official unemployment rate may overstate the level of unemployment B. unemployed and therefore the official unemployment rate may understate the level of unemployment C. fully employed and therefore the official unemployment rate may overstate the level of unemployment D. fully employed and there fore the official unemployment rate may understate the level of unemployment
answer

D. fully employed and therefore the ooffical unemployment rate may understate the level of unemployment
question

Assuming the total population is 100 million, the civil labor force is 50 million, and 47 million workers are employed, the unemployment rate is: A. 3 percent B. 6 percent C. 7 percent D. 53 percent
answer

B. 6 percent
question

The natural rate of unemployment is the: A. unemployment rate experience at the depth of a depression B. full-employment unemployment rate C. unemployment rate experience by the least-skilled workers in the economy D. unemployment rate experienced by the most skilled workers in the economy.
answer

B. full-employment unemployment rate
question

Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will being better job next week with company B. Kyle will be considered as: A. cyclically unemployed B. frictionally unemployed C. structurally unemployed D. employed
answer

B. frictionally unemployed
question

The unemployment rate is the: A. ratio of unemployed workers B. number of employed workers minus the number of workers who are not in the labor force. C. percentage of the labor force that is unemployed D. percentage of the total population
answer

C. percentage of the labor force that is unemployed
question

Suppose there are five million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would: A. decline B. increase C. increase in the short run but eventually decline D. be unchanged
answer

A. decline
question

Susie has lost her job in Vermont textile plant because of important competition. She intents to take a sort course in electronics and move to Oregon where she anticipates that a new job will be available. We can say that Susie is faced with: A. seasonal unemployment B. cyclical unemployment C. structural unemployment D. frictional unemployment
answer

C. structural unemployment
question

Cyclical unemployment results from: A. a deficiency of spending on goods and services B. the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy C. the everyday dynamics of free labor market, with workers voluntary changing jobs. D. technological change
answer

A. a deficiency of spending on goods and services
question

Which of the following is correct: A. the unemployment rates of men and women workers are roughly the same B. unemployment rates for African-American and white workers are approximately the same C. Teenager experience approximately the same unemployment rates as do adults D. Laborers are less vulnerable to unemployment than are professional workers
answer

A. the unemployment rates of men and women workers are roughly the same
question

A college graduate using the summer following graduation to search of a job would best be classified as: A. not officially a member of the labor force B. a part of structural unemployment C. a part of cyclical unemployment D. a part of fictional unemployment
answer

D. a part of frictional unemployment
question

Unemployment involving mismatch of the skills of unemployed workers and the skills required for available jobs is called: A. frictional unemployment B. structural unemployment C. cyclical unemployment D. compositional unemployment
answer

B. structural unemployment
question

Structural unemployment: A. is also know as frictional unemployment B. is the main component of cyclical unemployment C. is said to occur when people are waiting to be called back to previous jobs D. may involve a locational mismatch between unemployed workers and job openings
answer

D. may involve a location mismatch between unemployed workers and job openings
question

Dr. Homer Simpson, an economic professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as: A. structurally unemployed B. frictionally unemployed C. not in the labor force D. employed
answer

D. employed
question

Which of the following constitute the types of unemployment occurring at the natural rate of unemployment? A. frictional and cyclical unemployment B. structural and frictional unemployment C.cyclical and structural unemployment D. Frictional, structural, and cyclical unemployment
answer

B. structural and frictional unemployment
question

Wait unemployment are both types of: A. cyclical unemployment B. hidden unemployment C. frictional unemployment D. structural unemployment
answer

C. frictional unemployment
question

The type of unemployment associated with recessions is called: A. frictional unemployment B. structural unemployment C. cyclical unemployment D. seasonal unemployment
answer

C. cyclical unemployment
question

Suppose there are 10 million part-time workers and 90 million full time workers in an economy. Five million of the part-time workers switch to full time. As a result: A. the official unemployment rate will fall B. the official unemployment rate will rise C. the official unemployment rate will remain unchanged D. the size of the labor force will increase
answer

C. the official unemployment rate will remain unchanged
question

The government agency responsible for collecting and reporting unemployment data is the: A. Bureau of Labor Statistics B. Bureau of Unemployment C. Bureau of Economic Analysis D. Bureau of Economic Research
answer

A. Bureau of Labor Statistics
question

At the economy’s natural rate of unemployment: A. the economy achieves its potential output B. there is only a relative small about of cyclical unemployment C. only frictional unemployment exists D. only structural unemployment exists
answer

A. the economy achieves its potential output
question

In the depth of the Great Depression, the unemployment rate in the United States was about: A. 15 percent B. 33 percent C. 25 percent D. 40 percent
answer

C. 25 percent
question

Answer the question on the basis of the following information about hypothetical economy: Full-time employed=80 Part-time employed=25 Unemployed=15 Discouraged Workers=5 Members of Underground Economy=6 Consumer Price Index=110 Refer to the information above: The unemployment rate is: A. 18.8 percent B. 12.5 percent C. 16.7 percent D. 25 percent
answer

B. 12.5 percent
question

Answer the question on the basis of the following information about hypothetical economy: Full-time employed=80 Part-time employed=25 Unemployed=15 Discouraged Workers=5 Members of Underground Economy=6 Consumer Price Index=110 Refer to the above information. If the members of the underground economy are presently counted as a part of the unemployed when in fact they are employed, the official unemployment rate is overstated by about: A. 0 percentage points B. 2 percentage points C. 4 percentage points D.6 percentage points
answer

C. 4 percentage points
question

Answer the question on the basis of the following information about hypothetical economy: Full-time employed=80 Part-time employed=25 Unemployed=15 Discouraged Workers=5 Members of Underground Economy=6 Consumer Price Index=110 Refer to the above information. The rate of inflation: A. is 110 percent B. is 10 percent C. is 0 percent D. cannot be determined from the data
answer

D. cannot be determined from the data
question

Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services? A. search unemployment B. wait unemployment C. cyclical unemployment D. frictional unemployment
answer

C. cyclical unemployment
question

The GDP gap measures the difference between: A. NDP and GDP B. NI and PI C. actual GDP and potential GDP D. nominal GDP and real GDP
answer

c. actual GDP and potential GDP
question

A large negative GDP gap implies: A. an excess of imports over exports B. a low rate of unemployment C. a high rate of unemployment D. a sharply rising price level
answer

C. a high rate of unemployment
question

The aggregate cost of unemployment can be measured by the: A. amount by which actual GDP exceeds potential GDP B. amount by which potential GDP exceeds actual GDP C. excess of real GDP over nominal GDP D. excess of nominal GDP over real GDP
answer

B. amount of which potential GDP exceeds actual GDP
question

If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is: A. $300 billion B. $30 billion C. $360 billion D.$630 billion
answer

C. $360 billion
question

If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is: A. $360 billion B.$660 billion C.$320 billion D.$20 billion
answer

C. $320 billion
question

If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is: A.$510 billion B.$490 billion C.$10 billion D.$990 billion
answer

A.$510 billion
question

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is: A. $415 billion B. $385 billion C. $15 billion D. $785 billion
answer

B.$385 billion
question

Assume the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. According to Okun’s law, the negative GDP gap as a percent of potential GDP is: A. 4 percent B. 8 percent C. 10 percent D. 2 percent
answer

B. 8 percent
question

The relationship between the size of the negative GDP gap and the unemployment rate is: A. direct B. inverse C. undefined D. direct during recession, but inverse during expansion
answer

A. direct
question

If actual GDP is less than potential GDP: A. potential GDP will fall B. the price level will rise C. investment spending will fall D. the actual unemployment rate will be higher than the natural unemployment rate
answer

D. the actual unemployment rate will be higher than the natural unemployment rate
question

Full-employment output is also called: A. zero-unemployment output B. equilibrium output C. potential output D. zero-savings output
answer

C. potential output
question

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun’s law is applicable: Potential Real GDP=$200 billion Natural Rate of Unemployment=6 percent Actual Rate of Unemployment=12 percent Refer to the above data. The size of the negative GDP gap as a percent of potential GDP for the above economy is: A. 6 percent B. 9 percent C. 12 percent D. 15 percent
answer

C. 12 percent
question

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun’s law is applicable: Potential Real GDP=$200 billion Natural Rate of Unemployment=6 percent Actual Rate of Unemployment=12 percent Refer to the above data. The amount of output vein forgone by the above economy is: A. $12 billion B. $15 billion C. $18 billion D.$24 billion
answer

D. $24 billion
question

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun’s law is applicable: Potential Real GDP=$200 billion Natural Rate of Unemployment=6 percent Actual Rate of Unemployment=12 percent Refer to the above data. If the unemployment rate in the above economy fell to 6 percent, we could conclude that: A. only structural unemployment B. the economy’s production possibilities curve shifted outward. C. the economy had moved from a point inside its production possibilities curve to point on or near the curve D. nominal GDP would rise but real GDP would fall
answer

C. the economy had moved from a point inside its production possibilities curve to a point on or near the curve
question

Oknu’s Law: A. measures the tradeoff between the rate of inflation and the rate of unemployment B. indicates the number of years it will take for a constant rate of inflation to double the price level. C. quantifies the relationships between nominal and real incomes. D. shows the relationship between the unemployment rate and size of the negative GDP gap
answer

D. shows the relationship between the unemployment rate and the size of the negative GDP gap
question

For every 1 percentage point the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of: A. Taylor’s rule B. Okun’s law C. Say’s law D. the Coase theorem
answer

B. Okun’s law
question

Inflation means that: A. all prices and rising, but at different rates B. all prices and rising and at the same rate C. prices on average are rising, although some particular prices may be falling D. real income rising
answer

C. prices on average rising, although some particular prices may be falling
question

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced: A. inflation of 4 percent B. inflation of 3.33 percent C. deflation of 3.33 percent D. deflation of 4 percent
answer

C. deflation of 3.33 percent
question

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about. A. 2.8 percent B. 3.4 percent C. 1.6 percent D. 4.1 percent
answer

C. 1.6 percent
question

The annual rate of inflation can be found by subtracting: A. the real income from the nominal income B. last year’s price index from last year’s price index and dividing the difference by this year’s price index C. last year’s price index from this year’s price index. D. last year’s price index from this year’s price index and dividing the difference by last year’s price index.
answer

D. last year’s price index from this year’s price index and dividing the difference by last year’s price index
question

If the Consumer Price Index rises from 300 to 333 in particular year, the rate of inflation in that year is: A. 11 percent B. 33 percent C. 91 percent D. 10 percent
answer

A. 11 percent
question

As applied to the price level, the “rule of 70” indicates that the number of years required for the price level to double can be found by: A. dividing “70” into the annual rate of inflation B. dividing the annual rate of inflation into “70” C. subtracting the annual charge in nominal incomes from “70” D. multiplying the annual rate of inflation by “70”
answer

B. dividing the annual rate of inflation into “70”
question

Between 1980 and 2000 the price level approximately doubled. The average annual rate of inflation over this 20- year period was about: A. 5.5 percent B. 4.7 percent C. 3.5 percent D. 2.8 percent
answer

C. 3.5 percent
question

Given the annual rate of inflation, the “rule of 70” allows one to: A. determine whiter the inflation is demand-pul or cost-push B. calculate the accompanying rate of unemployment C. determine when the value of real asset will approach zero D. calculate the number of years required for the price level to double
answer

D. calculate the number of years required for the price level to double
question

If Fred’s annual real income rises by 8 percent each year, his annual real income will double in about: A. 8-9 years B. 10-11 years C. 5-6 years D. 19-20 years
answer

A.8-9 years
question

If the rate of inflation is 12 percent per year, the prince level will double in about: A. 4 years B. 6 years C. 10 years D. 12 years
answer

B. 6 years
question

Compared to other industrial nations, inflation rates in the United States are: A. significantly higher B. significantly lower C. significantly higher than those in Europe, and significantly higher than those in Europe, and significantly lower than those in Japan D. neither significantly higher nor significantly lower
answer

D. neither significantly higher nor significantly lower
question

Demand-pull inflation A. occurs when the prices of resources rises, pushing up costs and the price level B. occurs when total spending exceeds the economy’s ability to provide output at the existing price level C. occurs only when the economy has reached its absolute production capacity. D. is also called cost-push inflation
answer

B. occurs when total spending exceeds the economy’s ability to provide output at the existing price level
question

Demand-pull inflation: A. occurs when total spending in the economy is excessive B. is measured differently than cost-push inflation C. can be present even during an economic depression D. is also called “hyperinflation”
answer

A. occurs when total spending in the economy is excessive
question

The phrase “too much money chasing too few goods” best describes: A. the GDP gap B. demand-pull inflation C. the inflation premium D. cost-push inflation
answer

B. demand-pull inflation
question

Unlike demand-pull inflation, cost-pull inflation: A. is self-limiting B. drives up the price level C. increases nominal income D. increases real income
answer

A. is self-limiting
question

Inflation initiated by increases in wages or other resources prices is labeled: A. demand-pull inflation B. demand-push inflation C. cost-push inflation D. cost-pull inflation
answer

C. cost-push inflation
question

Cost-push inflation: A. is caused by excessive total spending B. shifts the nation’s production possibilities curve leftward C. moves the economy inward from its production possibilities curve D. is a mixed blessing because it has positive effects on real output and employment
answer

C. moves the economy inward from its productions possibilities curve.
question

Cost-push inflation may be caused by: A. a decline in per unit production costs B. a decrease in wage rates C. a negative supply shock D. an increase in resource availability
answer

C. a negate supply shock
question

Rising per-unit production costs are most directly associated with: A. frictional unemployment B. structural unemployment C. demand-pull inflation D. cost-push inflation
answer

D. cost-push inflation
question

Which of the following would most likely occur during the expansionary phase of the business cycle? A. demand-pull inflation B. cost-push inflation C. structural inflation D. frictional inflation
answer

A. demand-pull inflation
question

Real income is found by: A. dividing nominal income by 70 B. multiplying nominal income by 1.03 C. dividing the price index (in hundredths) by nominal income D.dividing nominal income by the price index (in hundredths)
answer

D. dividing nominal income by the price index (in hundredths)
question

Which of the following formulas is correct? Percentage change in: A. price level approximates percentage change in real income minus percentage change in nominal income B. real income approximates percentage change in nominal income minus percentage change in price level C. nominal income approximates percentage change in price level minus percentage change in real income D. real income approximates percentage change in price level minus percentage change in nominal income
answer

B. real income approximates percentage change in nominal income minus percentage change in price level
question

Real income can be determined by: A. dividing the price level by nominal income B. inflating nominal income for inflation C. dividing the annual rate of inflation into the number “70” D. deflating nominal income for inflation
answer

D. deflating nominal income for inflation
question

Suppose that a person’s nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person’s real income will: A. fall by about 20 percent B. fall by about 2 percent C. rise by about 15 percent D. rise by about 25 percent
answer

C. rise by about 15 percent
question

Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is the critic correct? A. Yes, because when you have a large nominal income your standard of living automatically increases. B. No, because real income may fall if prices increases more proportionately than increases in the nominal income e C. No, because real income may fall if the prices increase less proportionately than the increases in nominal income. D. Yes, because real income may fall if prices increases less proportionately than the increases in nominal income.
answer

B. No, because real income may fall if prices increase more proportionately than the increase in nominal income.
question

Suppose that a person’s nominal income income rises by 5 percent and the price level rises from 125 to 130. The person’s real income will: A. fall by about 1 percent B. remain consent C. rise by about 4 percent D. rise by about 1 percent
answer

D. rise by about 1 percent
question

In 2005, Tatum’s nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum’s real income: A. may have either increased or decreased B. rose by approximately 6.2 percent C. rose by approximately 3 percent D. fell by approximately 13 percent
answer

C. rose by approximately 3 percent
question

In which of the following cases would real income rises: A. nominal income rises by 8 percent, and the price level rises by 10 percent B.nominal income rises by 2 percent, and the price level remains unchanged C. nominal income falls by 4 percent, and the price level falls by 2 percent D. real income will rise in all the cases
answer

B. nominal income rises by 2 percent, and the prie level remains unchanged
question

Under which of the following circumstances would dew observe the greatest increase in real income: A. nominal income falls by 2 percent, and the price level falls by 10 percent B.nominal income rises by 8 percent, and the price level rises by 4 percent C. nominal income rises by 12 percent, and the price level rises by 15 percent. D. nominal income falls by 4 percent, and the price level rises by 6 percent
answer

A. nominal income falls by 2 percent, and the price level falls by 10 percent
question

Cost-pull inflation: A. reduces real output B. increase real output C. reduces the unemployment rate D. raises the natural rate unemployment
answer

A. reduces real output
question

Cost-of-living adjustment clauses ( COLAs): A. invalidate the “rule of 70” B. apply only to demand-pull inflation C. increase the gap between nominal and real income D.tie wage increases to changes in the price level
answer

D. tie wage increase to changes in the price level
question

During a period of hyper inflation: A. creditors gain because their loans are repaid with dollars of higher value B. people tend to hold goods rather than money C. income is redistributed away for borrowers D. the real value of the national currency rises
answer

B. people tend to hold goods rather than money.
question

Inflation is undesirable because it: A. arbitrary redistributes real income and wealth B. invariably lends to hyperinflation C. usually is accompanied by declining real GDP D. reduces everyone’s standing of living
answer

A. arbitrary redistributes real income and wealth
question

Who is least likely to be hurt by unanticipated inflation? A. a disabled laborer who is living accumulated savings B. an owner of a small business C. a secretary D. a pensioned steelworker
answer

B. an owner of a small business
question

Unanticipated inflation: A. reduces the real burden of the public debt to the Federal government B. hurts borrows and helps lenders C. hurts people whose sole source of income is from Social Security benefits D. helps savers
answer

A. reduces the real burden of the public debt to the Federal government
question

A lender need not be penalized by inflation if the: A. long-term rate of inflation is less than the short-term rate of inflation B.short-term rate of inflation is less than the long term rate of inflation C. lender correctly anticipates inflation and increases the nominal interest rate accordingly D. inflation is unanticipated by both borrow and lender
answer

C. lender correctly anticipates inflation and increases the nominal interest rate accordingly
question

Inflation affects: A. both the level and the distribution of income B. neither the level nor the distribution or income C. the distribution, but not the level, of income D. the level, but not the distribution of income
answer

A. both the level and the distribution of income
question

If both the real interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is: A. 8 percent B. 5 percent C. 3 percent D. 2 percent
answer

C. 3 percent
question

If both the real interest rate and the nominal interest rate are 3 percent, then the: A. inflation premium is zero B. real GDP must exceed the nominal GDP C. nominal GDP must exceed real GDP D. inflation premium also is 3 percent
answer

A. inflation premium is zero
question

Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is: A. 6 percent B. 8 percent C. 2 percent D. 3 percent
answer

D. 3 percent
question

Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of: A. 2 percent B. 3 percent C. 5 percent D. 7 percent
answer

D. 7 percent
question

(consider this) The feudal practice of clipping coins illustrates the idea of: A. taxation through inflation B. good money driving out bad money C. the derived demand for resources D. cost-push inflation
answer

A. taxation through inflation
question

(consider this) The main point of the Consider This box on clipping counts is that: A. decreases in the money supply cause deflation B. decreases in tax rates often increases tax revenues C. inflation imposes a “hidden tax” on those who hold money D. demand create its own supply
answer

C. inflation imposes a “hidden tax”on those who hold money
question

(Last Word) Declines in the stock prices measured by the Dow Jones average: A. are major cause of recessions B. usually reduce saving and increase consumption spending C. usually increase investment and reduce net exports D. sometimes precede recessions, sometimes do not
answer

D. sometimes precede recessions; sometimes do not
question

(Last Word) changes in market prices: A. do not greatly impact macroeconomy used alone are not reliable predators of the future health of the economy B. greatly impact the macroeconomy but used alone are not reliable predictors of the future health of the economy C. greatly impact the macroeconomy and used alone are reliable predators of the future health and economy D. do not greatly impact the macroeconomy but used alone are reliable predators of the future health of the economy
answer

A. do not greatly impact macroeconomy used alone are not reliable predators of the future health of the economy
question

(Last Word) A burst stock market bubble might adversely affect the economy by: A. causing rapid inflation B. greatly reducing net exports C. causing a severe negative wealth effect, leading to pessimism about the economy’s future. D. raising interest rates
answer

C. causing a severe negative wealth effect, leading toe pessimism about the economy’s future
question

The production of durable goods is more stable than the production of nondurables over the business cycle: (T/F)
answer

False
question

The business cycle is so named because upswings and downswings in business activity are predictably equal in terms of duration and intensity:(T/F)
answer

False
question

People who work part time, but desire to work full time, are considered to be officially unemployed: (T/F)
answer

False
question

The natural rate of unemployment in the United States is about 4 to 5 percent: (T/F)
answer

True
question

An annual rate of inflation of 7 percent will double the price level in about 15 years: (T/F)
answer

False
question

During the past ten years the annual rate of inflation in the United States has averaged less than 1 percent: (T/F)
answer

False
question

IF the price level double in a 23- year period, we can conclude that the average annual rate of inflation over that period was about 3 percent: (T/F)
answer

True
question

Unanticipated inflation benefits debtors at the expense of creditors: (T/F)
answer

True
question

Unanticipated inflation befits some groups in the economy: (T/F)
answer

True
question

If the nominal interest rate is 8 percent and the real interest rate is 5 percent, then the inflation premium is 13 percent: (T/F)
answer

False
question

Define and give an example of hyperinflation
answer

Definition: Monetary inflation occurring at very high rate. In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency and causing the population to minize their holdings of the local money. Example: In Germany in November 1922, the gold value of money in circulation fell from 300 million Euros before World War 1 to 20 million euros afterwards
question

Define inflation, how does it affect purchasing power?
answer

-A rise in the general level of prices in an economy -Each dollar of income will buy fewer goods than before (reduces purchasing powers)
question

Calculate inflation rate from changes in the CPI (Hint: remember the percentage change formula which is new-old, diving by old)
answer

-Percent change= (new-old)/old
question

Define and give example of cost-push inflation:
answer

-Definition: Increases in the price level (inflation) resulting from an increase in resource costs and hence in per-unit production costs; inflation causes by reductions in aggregate supply Example: rises in oil prices other prices or other raw materials
question

Define and give example of demand-pull inflation:
answer

Definition: Describes the scenario that occurs when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase. Economists will often say that demand-pull inflation is a result of too many dollars chasing too few goods. Example: As an act or athletic team, etc. gets more popular, the cost of their tickets on the open market (i.e. from scalpers, etc.) goes up even when the underlying ticket prices (those charged by the promoters, the team, etc.) haven’t changed.
question

Definition of business cycle (including defining all phases of the business cycle). What causes the fluctuations in the business cycle?
answer

Definition: Recurring increases and decreases in the level of economic activity over periods of years Stages: Peak, recession, trough, and expansion phases Fluctuations caused by: Economic shocks Prices are “sticky” downwards Economic response entails decreases in output & employment
question

Define and give formula for calculating the unemployment rate
answer

Definition: the percentage of the labor force unemployed at any time Formula: Unemployment Rate = (# of unemployed/labor force) X 100
question

Definition: the percentage of the labor force unemployed at any time Formula: Unemployment Rate = (# of unemployed/labor force) X 100
answer

Discouraged WoDefinition: the percentage of the labor force unemployed at any time Formula: Unemployment Rate = (# of unemployed/labor force) X 100 Definition: the percentage of the labor force unemployed at any time Formula: Unemployment Rate = (# of unemployed/labor force) X 10 workers: employees who have left the labor force because they have not been able to find employment -Discouraged workers are not counted as unemployed in the labor force
question

Define and give examples of the three types of unemployment
answer

Critical unemployment: is unemployment that results when the overall demand for goods and services in an economy cannot support full employment. It occurs during periods of slow economic growth or during periods of economic contraction. Frictional unemployment: Unemployment that is always present in the economy, resulting from temporary transitions made made by workers and employers or from workers and employers having inconsistent or incomplete information. Structural unemployment: Is an unemployment that comes from there being an absence of the demand for the workers that are available
question

Define the full-employment rate of unemployment (or natural rate of unemployment). How could I calculate it if I knew the rates of each type of unemployment?
answer

Natural rate of unemployment (NRU): The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment in the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation Formulas (all mean the same thing): Natural Rate of Unemployment (NRU) = Full Employment Rate of Unemployment NRU = Frictional unemployment + Structural unemployment NRU = zero cyclical unemployment
question

Define potential GDP vs. actual GDP; define the GDP gap
answer

Potential GDP: Amount of GDP we would produce if we were at full employment Actual GDP: C+Ig+G+Xn GDP Gap = Actual GDP – Potential GDP
question

Define, give formula and an example of Okun’s Law.
answer

Indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs For example, in 2009 the unemployment rate was 9.3%, or 4.3 percentage points above that period’s 5% natural rate of unemployment. Multiplying this 4.3% by Okun’s 2 indicates that 2009’s GDP gap was 8.6% of potential GDP (in real terms). By applying this 8.6% loss to 2009’s potential GDP of $13,894 billion, we find that the economy sacrificed $1,195 billion of real output because the natural rate of unemployment was not achieved.
question

Define the multiplier effect
answer

Definition: The expansion of country’s money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.
question

Describe the effect of changes in income on the consumption schedule:
answer

Income increases, consumption line shifts upward Income decreases, consumption line shifts downward
question

Describe the factors that explain the instability of investment
answer

Variability of expectations: business expectations can change quickly when some event suggests a significant possible change in future businesses. i.e. changes in exchange rates, trade barriers, legislative action, stock market prices, government economic policies, etc. Durability: Capital goods have inefinite useful life spans, firms can scrap or replace older equipment and buildings, or they can patch them up and use them for a few more years Irregularity of Innovation: New products and processes stimulate investment; major innovations induce vast upsurges or “waves” of investment spending that in time recede. Such innovations occur quite irregularly, adding to the volatility of investment. i.e. railroads, electricity, airplanes, automobiles, computers, the Internet, cell phones Variability of Profits: High current profits often generate optimism about the future profitability of new investments, whereas low current profits or losses spawn considerable doubt about the wisdom of the new investments. Current profits affect both the incentive and ability to invest.
question

Define MPC and give the formula for calculating it; define MPS and give the formula for calculating it
answer

MPC: Marginal Propensity to consume = Change in Consumption/Change in Income MPS: Marginal Propensity to save = Change in Saving/Change in Income MPC + MPS = 1
question

List the two basic determinants of investment
answer

Interest Rates Rate of Return
question

List the other determinants of investment
answer

Acquisition, maintenance and operating costs Business taxes Technological change Stock of capital goods on hand Planned inventory changes Expectations
question

Describe how a change in interest rates affect investment and consumption and GDP
answer

A change in interest rates will in turn affect the spending decisions of consumers and firms. With lower interest rates it is cheaper for firms to invest and for consumers to buy durable goods, and this will shift the aggregate demand curve to the right, increasing output Higher interest rates decrease investment, and consumption, which decreases aggregate demand
question

List the formula for calculating rate of return
answer

Expected Rate of Return = Profit/Cost Profit = Additional Revenue – Cost
question

List the formula for calculating the multiplier from MPC or MPS
answer

– Multiplier = 1/MPS – MPS = 1 – MPC – MPC = (Change in spending) / (Change in income)
question

List the formula for calculating change in GDP and make sure you can restate it for calculating change in spending (aggregate expenditures) necessary to yield a certain change in GDP
answer

– Change in GDP = Change in spending X Multiplier – Change in Spending = Change in GDP / Multiplier
question

Define a “private” economy; define a “closed” vs. “open” economy
answer

Private: excludes government Closed: No net exports (US only) Open: has the rest of the world (imports/exports)
question

Describe how a change in net exports affects aggregate expenditures and GDP
answer

– Prosperity Abroad—A rising level of real output and income among U.S. foreign trading partners raises net exports and increases U.S. GDP – Exchange Rates—Depreciation of the dollar relative to other currencies enables people abroad to obtain more dollars with each unit of their own currencies – **Net exports can increase aggregate expenditures & GDP**
question

Describe how a change in taxes affects GDP (include a discussion of MPS and MPC)
answer

Taxes reduce disposable income relative to GDP by the amount of the taxes. The decline in DI reduces both consumption and saving at each level of GDP. The extent of the C and S reductions depends on the MPC and the MPS. – Increase in taxes, decrease in consumption…Aggregate expenditures line shifts downward Increase in G, aggregate expenditures line shifts upward
question

Outline the process for calculating the multiplier from a change in spending shown on an AE graph
answer

Multiplier = 1/MPS; MPS = 1-MPC; MPC = Change in spending / Change in income – Change in spending…look at Agg. Expenditures (y-axis) & calculate the distance between 2 points – Change in income…look at GDP (x-axis) & calculate the distance between 2 points – Plug into MPC formula – Subtract MPC from 1 to get MPS – Use MPS to find the multiplier – Voila 🙂
question

Define a recessionary gap; define an inflationary gap
answer

Recessionary gap: The amount by which the aggregate-expenditures schedule must shift upward to increase real GDP to its full-employment, noninflationary level. Inflationary gap: In the aggregate-expenditures model, the amount by which the aggregate-expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary GDP.
question

Discuss how to correct a recessionary (or inflationary) gap
answer

full-employment GDP; NEED increase in spending – Increase Government Spending AND/OR Decrease Taxes – Inflationary Gap Correction: There is too much aggregate spending & spending is above full-employment GDP; NEED decrease in spending – Decrease Government Spending AND/OR Increase Taxes
question

Describe the effect a change in taxes would have on the consumption schedule
answer

Describe the effect a change in taxes would have on the consumption schedule
question

Discuss the conditions of equilibrium GDP (How do you know where equilibrium is?)
answer

Equilibrium GDP is where Real Domestic Output (GDP=DI) is equal to Aggregate Expenditure – Increase in investment shifts the line to the left and a decrease in investment shifts to right
question

Discuss the relationships shown by the AD curve
answer

Real Balances Effect: accumulation of things your money has bought; value of what I’ve already accumulated – Interest Rate Effect: As the interest rate decreases, we buy more stuff – Foreign Purchases Effect: As our price decreases, other countries buy more of our stuff
question

Discuss the shape of the AS curve including discussion what each range means (the horizontal portion vs. the upward sloping portion vs. the vertical portion)
answer

– Aggregate Supply Curve: total real output produced at each price level; how much time producers have to adjust to change; relationship depends on time horizon (immediate short run, short run, or long run) – 3 Regions: – Horizontal: Recession; No change in price level while GDP changes; not full employment – Upward Sloping: Full employment; change in both price level and GDP Vertical: Inflation; No change in GDP with price level changes; not full employment
question

Discuss the determinants of AS, be specific as to what shifts AS left or right
answer

Input prices: can be domestic or imported prices – Domestic: Decrease in wages, shift to the right; increase in wages, shift to the left – Imported: Decrease in price of imported resources, shift to the right; increase in price of imported resources, shift to the left – Productivity: a measure of the relationship between a nation’s real output and the amount of resources used to produce that output – Legal-Institutional Environment: Business taxes/subsidies and government regulation – Business taxes/subsidies: increase in business taxes (sales, excise & payroll taxes), increase per-unit production cost & shift curve to the left; Increase in business subsidies, decrease per-unit production cost & shift curve to the right – Government Regulation: More regulation tends to increase per-unit production cost & shift curve to the left
question

Effect of change in tax on AD AS model
answer

Increase in business taxes, shift AD & AS to the left – Decrease in business taxes, shift AD & AS to the right
question

Describe how a change in expected rates of return affects AD curve
answer

Higher expected returns on investment projects will increase the demand for capital goods and shift the AD curve to the right. Declines in expected returns will decrease investment and shift the curve to the left. Influencers of expected rate of return: Expectations about future business conditions Technology Degree of excess capacity Business Taxes
question

Describe how excess capacity affects AD AS model
answer

A rise in excess capacity (unused capital) will reduce the expected return on new investment and hence decrease AD. Firms operating factories at well below capacity have little incentive to build new factories. Firms discover capacity dwindling, their expected returns on new investment in factories and capital equipment rise… increase investment spending and shift AD curve to the right.
question

Describe how a change in national incomes of trading partners affects AD AS model
answer

Rising national income abroad encourages foreigners to buy more products, some of which are made in the US. US net exports rise, US AD curve shifts to the right. Declines in national incomes abroad reduce US net exports and shift AD curve to the left.
question

How does a change in productivity affect the AD AS model
answer

Definition: a measure of the relationship between a nation’s level of real output and the amount of resources used to produce that output. Doubling productivity reduces the per-unit production cost and by reducing the per-unit production cost, an increase in productivity shifts the AS curve to the right.
question

Describe the effect of a change in input prices on AD AS model
answer

Domestic Resource Prices: Decrease in wage or decrease in price of machinery and equipment will reduce per-unit production costs, shifting AS curve to the right. Increase in wages shifts curve to the left. Prices of Imported Resources: Resources imported from abroad (oil, tin, and copper) add to US AS. Added supplies of resources-whether domestic or imported-typically reduce per-unit production cost. Decrease in price of imported resources increases US AS, while an increase in their price reduces US AS.
question

Describe the effect of disequilibrium (output greater than/less than AD) on the price level
answer

Demand-pull inflation: price level is being pulled up by the increase in AD Deflation: a decline in price level; not the norm in American society; “Sticky prices”
question

Describe the effect of disequilibrium (output greater than/less than AD) on the price level
answer

Demand-pull inflation: price level is being pulled up by the increase in AD Deflation: a decline in price level; not the norm in American society; “Sticky prices”
question

Describe demand pull inflation, how is it modeled in the AD AS model
answer

Increases in AD= inflation Decreases in AD= recession Prices are downwardly sticky
question

Describe cost push inflation, how is it modeled in the AD AS model
answer

Aggregate supply shifting left Lower taxes
question

Define built-in or automatic stabilization policy
answer

Act to stabilize economic cycles and are automatically triggered without direct government intervention Examples: corporate and personal taxes, and unemployment insurance and welfare programs
question

Define “crowding out”
answer

increased government spending using borrowing, raises interest rates, therefore decreases spending/investment/loans by businesses
question

Define fiscal policy
answer

Changes in government spending and taxation in order to change output, employment, inflation (cure recessionary gap/ unemployment gap, inflationary gap)
question

Define expansionary policy (explain when to use this policy); list the change in taxes and government spending required for expansionary fiscal policy and the effect on AD and total output (GDP)
answer

Makes economy grow Problem: recession Goal: achieve full employment and/or economic growth Need to shift AD curve to the right Tools:—increase government spending —decrease taxes —combination Results: budget defect
question

Defined contractionary policy (explain when to use this policy); list the change in taxes and government spending required for contractionary fiscal policy and the effect on AD and total output (GDP)
answer

Makes economy shrink Problem: inflation Goal: reduce prices (or at least stabilize them) Need to shift AD curve to the left Tools: —decrease government spending —increase taxes —combination Result: budget surplus
question

Effect on federal budget as a result of expansionary fiscal policy; effect on federal budget as a result of contractionary fiscal policy
answer

Expansionary results in budget deficit Contractionary results in budget surplus
question

Be prepared to use data detailing spending for C, Ig, G and Xn and the level of GDP for full employment to determine appropriate fiscal policy
answer

Expansionary fiscal policy used to correct recession (level of employment is below GDP) Contractionary fiscal policy used to correct inflation (level of employment is above GDP)
question

Define the timing problems with fiscal policy
answer

Recognition lag: minimum 6 months before we recognize recession Administrative lag: (most important) everyone is talking about solutions to the problem/ takes a long time for everyone to agree Operational lag: Once the ‘fix the problem’- people have to determine how to spend the money
question

Describe what is meant by a political business cycle
answer

Politicians mission is to be re-elected– so they make changes in order to be re -elected not because the economy needs it
question

Define the public debt, including describing how it is financed and who the major holders of the US debt are.
answer

Public Debt: The total amount owed by the federal government to the owners of the government securities; equal to the sum of past government budget deficits less than government budget surpluses Financed by: Treasury bills, bonds Major Holders of US Debt: US Government , other US institutions, citizens, and foreign people
question

The most important determinant of consumer spending is: A. the level of household borrowing B. consumer expectations C. the stock of wealth D. the level of income
answer

D. the level of income
question

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? A. Bank panic of 1907 B. Great Depression C. Spectacular economic growth during World War II D. Economic expansion of the 1920s
answer

B the great Depression
question

The aggregate expenditures model is built upon which of the following assumptions? A. Prices are fixed. B. The economy is at full employment. C. Prices are fully flexible. D. Government spending policy has no ability to affect the level of output.
answer

A. Prices are Fixed
question

A private closed economy includes: A. households, businesses, and government, but not international trade. B. households, businesses, and international trade, but not government. C. households and businesses, but not government or international trade. D. households only.
answer

C. households and businesses, but not government or international trade
question

In the United States from 1929 to 1933, real GDP ____________, and the unemployment rate _______________. A. declined by 27 percent; rose to 25 percent B. increased by 21 percent; fell to 2 percent C. declined by 21 percent; rose to 27 percent D. declined by 40 percent; rose to 50 percent
answer

A. declined by 27%; rose by 25%
question

In the aggregate expenditures model, it is assumed that investment: A. automatically changes in response to changes in real GDP. B. changes by less in percentage terms than changes in real GDP. C. does not respond to changes in interest rates. D. does not change when real GDP changes.
answer

D. does not change when real GDP changes
question

All else equal, a large decline in the real interest rate will shift the: A. investment demand curve leftward. B. investment demand curve rightward. C. investment schedule upward. D. investment schedule downward.
answer

C. investment schedule upward.
question

The level of aggregate expenditures in the private closed economy is determined by the: A. expenditures of consumers and businesses. B. intersection of the saving schedule and the 45-degree line. C. equality of the MPC and MPS. D. intersection of the saving and consumption schedules.
answer

A. expenditures of consumers and businesses.
question

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of: A. a decline in the size of the inflationary gap. B. an increase in the MPC. C. an increase in the MPS. D. a decline in the general price level.
answer

B. an increase in the MPC

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