question
In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?
A. Taxes on the production of goods and services are determined according to individual income.
B. People tend to spend all of their income on goods and services.
C. Domestic expenditures on imports generally equal foreign expenditures on U.S. exports.
D. Every penny spent on a good or service must end up as someone's income.
A. Taxes on the production of goods and services are determined according to individual income.
B. People tend to spend all of their income on goods and services.
C. Domestic expenditures on imports generally equal foreign expenditures on U.S. exports.
D. Every penny spent on a good or service must end up as someone's income.
answer
D. Every penny spent on a good or service must end up as someone's income.
question
What are the four major components of expenditures in GDP?
A. Consumption, Intermediate Goods, Government Purchases, and New Expenditures
B.Consumption, Investment, Government Purchases, and Non-Durable Expenditures
C. Consumption, Investment, Government Purchases, and Net Exports
D. Consumption, Intermediate Goods, Goods and Services, and Net Exports
A. Consumption, Intermediate Goods, Government Purchases, and New Expenditures
B.Consumption, Investment, Government Purchases, and Non-Durable Expenditures
C. Consumption, Investment, Government Purchases, and Net Exports
D. Consumption, Intermediate Goods, Goods and Services, and Net Exports
answer
C. Consumption, Investment, Government Purchases, and Net Exports
question
Gross Domestic Product (GDP) is
A. the quantity of all final goods and services produced in a country during a period of time.
B. the amount of income generated from wages, rents, and profits in a country during a period of time.
C. the value of all expenditures made by households and firms in a country during a period of time.
D. the market value of all final goods and services produced in a country during a period of time.
A. the quantity of all final goods and services produced in a country during a period of time.
B. the amount of income generated from wages, rents, and profits in a country during a period of time.
C. the value of all expenditures made by households and firms in a country during a period of time.
D. the market value of all final goods and services produced in a country during a period of time.
answer
D. the market value of all final goods and services produced in a country during a period of time.
question
Investment, as defined by economists, would include the purchase of a
A. corporate bond.
B. government bond.
C. computer by an accounting firm.
D. share of stock in ExxonMobil.
A. corporate bond.
B. government bond.
C. computer by an accounting firm.
D. share of stock in ExxonMobil.
answer
C. computer by an accounting firm.
question
How does the size of a country's GDP affect the quality of life of the country's people?
A. Generally, the more goods and services people have, the worse off they are.
B. There is an inverse relationship between GDP and quality of life.
C. When GDP is high, production from the underground economy, and therefore the crime rate, is high.
D. Generally, the more goods and services people have, the better off they are.
A. Generally, the more goods and services people have, the worse off they are.
B. There is an inverse relationship between GDP and quality of life.
C. When GDP is high, production from the underground economy, and therefore the crime rate, is high.
D. Generally, the more goods and services people have, the better off they are.
answer
D. Generally, the more goods and services people have, the better off they are.
question
GDP is an imperfect measure of economic well-being because it fails to measure what types of production?
A. Household production and the underground economy.
B. Business investment and foreign production.
C. Household production and foreign production.
D. Foreign production and the government sector
A. Household production and the underground economy.
B. Business investment and foreign production.
C. Household production and foreign production.
D. Foreign production and the government sector
answer
A. Household production and the underground economy.
question
Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?
A. The value of leisure is not included in GDP.
B. GDP is not adjusted for pollution and it does not account for unequal income distribution.
C. GDP is not adjusted for crime or other social problems.
D. All of the above.
E. A and C only.
A. The value of leisure is not included in GDP.
B. GDP is not adjusted for pollution and it does not account for unequal income distribution.
C. GDP is not adjusted for crime or other social problems.
D. All of the above.
E. A and C only.
answer
D. All of the above.
question
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
A. Nominal GDP separates increases in GDP as a result of price changes from increases in GDP as a result of quantity changes.
B. When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
C. GDP is a measure of production in quantity terms.
D. All of the above
E. A and B only
A. Nominal GDP separates increases in GDP as a result of price changes from increases in GDP as a result of quantity changes.
B. When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
C. GDP is a measure of production in quantity terms.
D. All of the above
E. A and B only
answer
B. When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
question
How does real GDP deal with the problem inflation causes with nominal GDP?
A. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced.
B. Real GDP separates price changes from quantity changes.
C. Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years.
D.All of the above.
E.A and C only
A. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced.
B. Real GDP separates price changes from quantity changes.
C. Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years.
D.All of the above.
E.A and C only
answer
D.All of the above.
question
"If nominal GDP is less than real GDP, then the price level must have fallen during the year."
A. Agree. Real GDP will be less than nominal GDP if the price level falls and is lower than the base year's prices.
B. Agree. Nominal GDP will be less than real GDP if the price level falls and is higher than the base year's prices.
C. Disagree. Real GDP will be equal to nominal GDP if the price level increases and is equal to the base year's prices.
D. Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.
A. Agree. Real GDP will be less than nominal GDP if the price level falls and is lower than the base year's prices.
B. Agree. Nominal GDP will be less than real GDP if the price level falls and is higher than the base year's prices.
C. Disagree. Real GDP will be equal to nominal GDP if the price level increases and is equal to the base year's prices.
D. Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.
answer
D. Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.
question
"Whenever real GDP .. declines, nominal GDP must also decline."
A. Agree. Both real GDP and nominal GDP decline if price falls and output remains constant.
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
C. Agree. Both real GDP and nominal GDP decline if output falls and prices remain constant.
D. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.
A. Agree. Both real GDP and nominal GDP decline if price falls and output remains constant.
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
C. Agree. Both real GDP and nominal GDP decline if output falls and prices remain constant.
D. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.
answer
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
question
"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."
A. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.
C. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.
D. Agree. If prices fall, real GDP and nominal GDP will both fall if output increases.
A. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
B. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices fall.
C. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.
D. Agree. If prices fall, real GDP and nominal GDP will both fall if output increases.
answer
C. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.
question
"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."
A. Disagree. If real GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
B. Disagree. If nominal GDP declined between 2008 and 2009, then the GDP deflator could have gone up.
C. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
D. Disagree. If nominal GDP increased between 2008 and 2009, then the GDP deflator must have remained the same.
A. Disagree. If real GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
B. Disagree. If nominal GDP declined between 2008 and 2009, then the GDP deflator could have gone up.
C. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
D. Disagree. If nominal GDP increased between 2008 and 2009, then the GDP deflator must have remained the same.
answer
C. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
question
As of 2019, 19 countries in Europe had adopted the euro as their common currency. These countries are called the euro zone. According to an article in the Wall Street Journal, "The European Union's statistics agency said the combined GDP of the eurozone's 19 members increased by an annualized 1.5% in the three months through March."
Is it likely that the article is referring to the growth in nominal GDP or the growth in real GDP? Briefly explain.
A. Real GDP, because it shows how the economy's overall production of goods and services changes over time.
B. Real GDP, because it does a better job of determining how much the prices of goods and services have changed in an economy.
C. Nominal GDP, because it does a better job of separating the economy's production of goods from services.
D. Nominal GDP, because it uses current prices to place a value on the economy's production of goods and services.
Is it likely that the article is referring to the growth in nominal GDP or the growth in real GDP? Briefly explain.
A. Real GDP, because it shows how the economy's overall production of goods and services changes over time.
B. Real GDP, because it does a better job of determining how much the prices of goods and services have changed in an economy.
C. Nominal GDP, because it does a better job of separating the economy's production of goods from services.
D. Nominal GDP, because it uses current prices to place a value on the economy's production of goods and services.
answer
A. Real GDP, because it shows how the economy's overall production of goods and services changes over time.
question
Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP in each of the following situations?
a. In years after the base year, nominal GDP is ______ real GDP.
b. In the base year, nominal GDP is ______ real GDP.
c. In years prior to the base year, nominal GDP is _______ real GDP.
a. In years after the base year, nominal GDP is ______ real GDP.
b. In the base year, nominal GDP is ______ real GDP.
c. In years prior to the base year, nominal GDP is _______ real GDP.
answer
greater than
equal to
less than
equal to
less than
question
Using purchasing power parity exchange rates, which country has the largest GDP and which country has the second largest GDP? ________ has the largest GDP and ________ has the second largest GDP.
A. United States; Russia
B. China; Russia
C. China; United States
D.United States; China
A. United States; Russia
B. China; Russia
C. China; United States
D.United States; China
answer
C. China; United States
question
Of the eight largest economies in terms of GDP using purchasing power parity exchange rates, which country has the highest GDP per capita and which country has the lowest. ________ has the highest GDP per capita and ________ has the lowest GDP per capita.
A.United States; India
B. Germany; India
C. Germany; Brazil
D. United States; Brazil
A.United States; India
B. Germany; India
C. Germany; Brazil
D. United States; Brazil
answer
A.United States; India
question
What index measures the degree of inequality in the distribution of family income in a country?
A. Distribution index
B. Gini index
C. Income index
D. Equality index
A. Distribution index
B. Gini index
C. Income index
D. Equality index
answer
B. Gini index
question
Of the eight largest economies, which country has the most equal distribution of income and which country has the most unequal distribution of income? ________ has the most equal distribution of income and ________ has the most unequal distribution of income.
A. China; Russia
B. China; Indonesia
C. Germany; Russia
D. Germany; Brazil
A. China; Russia
B. China; Indonesia
C. Germany; Russia
D. Germany; Brazil
answer
D. Germany; Brazil
question
Which one of the following depicts an accurate description of the household survey and the establishment survey?
A. The household survey interviews households and measures the employment rate whereas the establishment survey interviews self-employed people and measures the unemployment rate.
B. The household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measures total employment in the economy.
C. The household survey interviews retired individuals and measures the unemployment rate whereas the establishment survey interviews working population and measures the employment rate.
D. The household survey conducts surveys of small companies and measures the employment and the unemployment rate whereas the establishment survey interviews big establishments and measures the unemployment rate.
A. The household survey interviews households and measures the employment rate whereas the establishment survey interviews self-employed people and measures the unemployment rate.
B. The household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measures total employment in the economy.
C. The household survey interviews retired individuals and measures the unemployment rate whereas the establishment survey interviews working population and measures the employment rate.
D. The household survey conducts surveys of small companies and measures the employment and the unemployment rate whereas the establishment survey interviews big establishments and measures the unemployment rate.
answer
B. The household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measures total employment in the economy.
question
Many economists prefer
A. the establishment survey because it is determined by actual payroll records rather than unverified answers.
B. the establishment survey because it can predict future stock prices of the companies it surveys.
C. the household survey because it gives data on unemployed and self-employed individuals.
D. the household survey because it provides a large sample of the population and so is more inclusive.
A. the establishment survey because it is determined by actual payroll records rather than unverified answers.
B. the establishment survey because it can predict future stock prices of the companies it surveys.
C. the household survey because it gives data on unemployed and self-employed individuals.
D. the household survey because it provides a large sample of the population and so is more inclusive.
answer
A. the establishment survey because it is determined by actual payroll records rather than unverified answers.
question
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?
A. It fails to account for illegal activities.
B. Discouraged workers are not considered unemployed.
C. It does not account for inaccurate responses to the Current Population Survey.
D. Underemployed people are considered employed.
E. All of the above.
A. It fails to account for illegal activities.
B. Discouraged workers are not considered unemployed.
C. It does not account for inaccurate responses to the Current Population Survey.
D. Underemployed people are considered employed.
E. All of the above.
answer
E. all of the above
question
Suppose the working−age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have
full−time employment; 20 have part−time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by the U.S. Bureau of Labor would equal
A. 20/100 X 100
B. 20/60 x 100
C. 20/80 x 100
D. 30/80 x 100
full−time employment; 20 have part−time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by the U.S. Bureau of Labor would equal
A. 20/100 X 100
B. 20/60 x 100
C. 20/80 x 100
D. 30/80 x 100
answer
A. 20/100 x 100
question
the president of a manufacturing firm that makes precision tools in California's Silicon Valley was quoted in an article in the Wall Street Journal as saying that "production workers...are scarce," and that "many applicants lack even the most rudimentary skills." He added that: "I would say in this valley, people looking for jobs are unemployed for a reason."
Source: Jeffrey Sparshott, "Skilled Workers are Scarce in Tight Labor Market," Wall Street Journal, February 2, 2017.
Are these applicants likely to be cyclically, frictionally, or structurally unemployed, and what would be the reason that most of them are unemployed? Briefly explain.
A. Frictionally unemployed, because of the additional time that these applicants spend in job search.
B. Cyclically unemployed, because business cycle recessions can lead to scarcity in certain occupations.
C. Structurally unemployed, because these applicants lack the skills required for the available jobs.
D. None of the above: These applicants would be considered discouraged workers because they can't find jobs that match their skills
Source: Jeffrey Sparshott, "Skilled Workers are Scarce in Tight Labor Market," Wall Street Journal, February 2, 2017.
Are these applicants likely to be cyclically, frictionally, or structurally unemployed, and what would be the reason that most of them are unemployed? Briefly explain.
A. Frictionally unemployed, because of the additional time that these applicants spend in job search.
B. Cyclically unemployed, because business cycle recessions can lead to scarcity in certain occupations.
C. Structurally unemployed, because these applicants lack the skills required for the available jobs.
D. None of the above: These applicants would be considered discouraged workers because they can't find jobs that match their skills
answer
C. Structurally unemployed, because these applicants lack the skills required for the available jobs.
question
Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck mechanic?
A. Cyclically unemployed
B. Seasonally unemployed
C. Frictionally unemployed
D. Structurally unemployed
A. Cyclically unemployed
B. Seasonally unemployed
C. Frictionally unemployed
D. Structurally unemployed
answer
A. Cyclically unemployed
question
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
A. Frictionally unemployed
B. Seasonally unemployed
C. Structurally unemployed
D.Cyclically unemployed
A. Frictionally unemployed
B. Seasonally unemployed
C. Structurally unemployed
D.Cyclically unemployed
answer
A. Frictionally unemployed
question
The natural rate of unemployment is
A. the sum of structural unemployment and frictional unemployment.
B. the sum of cyclical unemployment and frictional unemployment.
C. the sum of structural unemployment and cyclical unemployment.
D. the sum of seasonal unemployment and cyclical unemployment.
A. the sum of structural unemployment and frictional unemployment.
B. the sum of cyclical unemployment and frictional unemployment.
C. the sum of structural unemployment and cyclical unemployment.
D. the sum of seasonal unemployment and cyclical unemployment.
answer
A. the sum of structural unemployment and frictional unemployment.
question
When the economy is at full employment, unemployment is equal to?
A. cyclical unemployment -- seasonal unemployment
B. the natural rate of unemployment.
C. normal rate of unemployment -- abnormal rate of unemployment
D. zero
A. cyclical unemployment -- seasonal unemployment
B. the natural rate of unemployment.
C. normal rate of unemployment -- abnormal rate of unemployment
D. zero
answer
B. the natural rate of unemployment.
question
The unemployment rate
A. falls during recessions, rises during expansions, and is always above zero.
B. rises during recessions, falls during expansions, and can fall below zero.
C. falls during recessions, rises during expansions, and can fall below zero.
D. rises during recessions, falls during expansions, and is always above zero.
A. falls during recessions, rises during expansions, and is always above zero.
B. rises during recessions, falls during expansions, and can fall below zero.
C. falls during recessions, rises during expansions, and can fall below zero.
D. rises during recessions, falls during expansions, and is always above zero.
answer
D. rises during recessions, falls during expansions, and is always above zero.
question
The employment-population ratio measures the
A. percentage of the working age population that is not employed.
B. percentage of the working age population that is employed.
C. portion of the total population that is employed.
D.percentage of the working age population that is in the labor force.
A. percentage of the working age population that is not employed.
B. percentage of the working age population that is employed.
C. portion of the total population that is employed.
D.percentage of the working age population that is in the labor force.
answer
B. percentage of the working age population that is employed.
question
When an unemployed person drops out of the labor force, the unemployment rate
A. becomes more reliable as all the potential erroneous data are removed.
B. overstates the true degree of joblessness in the economy.
C. is not affected by the existence of such workers.
D. understates the true degree of joblessness in the economy.
A. becomes more reliable as all the potential erroneous data are removed.
B. overstates the true degree of joblessness in the economy.
C. is not affected by the existence of such workers.
D. understates the true degree of joblessness in the economy.
answer
D. understates the true degree of joblessness in the economy.
question
When an unemployed person drops out of the labor force, it
A. affects the employment-population ratio.
B. does not affect the unemployment rate.
C. does not affect the labor force participation rate.
D. does not affect the employment-population ratio.
A. affects the employment-population ratio.
B. does not affect the unemployment rate.
C. does not affect the labor force participation rate.
D. does not affect the employment-population ratio.
answer
D. does not affect the employment-population ratio.
question
what is is the percentage of the working-age population in the labor force?
answer
labor force participation rate
question
Suppose an economy is given by:
Population = 252 million
Working-age population = 148 million
Labor force = 104 million
The number of people employed = 98 million
The number of people unemployed = 6 million
The labor force participation rate for this economy is
Population = 252 million
Working-age population = 148 million
Labor force = 104 million
The number of people employed = 98 million
The number of people unemployed = 6 million
The labor force participation rate for this economy is
answer
70.3
question
Discouraged workers are classified by the BLS as
A. employed.
B. not in the labor force.
C. part-time employees.
D. unemployed.
A. employed.
B. not in the labor force.
C. part-time employees.
D. unemployed.
answer
not in the labor force
question
Which of the following would increase the unemployment rate?
A. a decrease in the minimum wage
B. a law making it illegal to work more than 35 hours per week
C. a cut in unemployment compensation
D. an increase in unemployment insurance payments
A. a decrease in the minimum wage
B. a law making it illegal to work more than 35 hours per week
C. a cut in unemployment compensation
D. an increase in unemployment insurance payments
answer
D. an increase in unemployment insurance payments
question
The price index which is used to measure changes in the cost of living is the
A. GDP Deflator.
B. Consumer Price Index (CPI).
C. Producer Price Index (PPI).
D. Retail Price Index.
A. GDP Deflator.
B. Consumer Price Index (CPI).
C. Producer Price Index (PPI).
D. Retail Price Index.
answer
B. Consumer Price Index (CPI).
question
During which period did the country experience zero inflation?
A. 2005 to 2010.
B. 1990 to 1995.
C. 2000 to 2005.
D. 1995 to 2000.
A. 2005 to 2010.
B. 1990 to 1995.
C. 2000 to 2005.
D. 1995 to 2000.
answer
C. 2000 to 2005.
question
During which period did the country experience an increasing rate of inflation?
A. 2005 to 2010.
B. 2000 to 2005.
C. 1995 to 2000.
D. 1990 to 1995
A. 2005 to 2010.
B. 2000 to 2005.
C. 1995 to 2000.
D. 1990 to 1995
answer
D. 1990 to 1995
question
What index is used to measure the average prices paid by a typical family?
An average of the prices of the goods and services purchased by a typical family is the:
A.aggregate price level index.
B. inflation rate index.
C. consumer price index (CPI).
D. producer price index (PPI).
An average of the prices of the goods and services purchased by a typical family is the:
A.aggregate price level index.
B. inflation rate index.
C. consumer price index (CPI).
D. producer price index (PPI).
answer
C. consumer price index (CPI).
question
Suppose the economy's consumer price index (CPI) in 2008 was 190 and the CPI in 2009 was 195.
The inflation rate over the period from 2008-2009 was equal to
The inflation rate over the period from 2008-2009 was equal to
answer
2.6%
question
A consumer price index of 160 in 1996 with a base year of 1982−1984 would mean that the cost of the market basket
A. rose 60% from the cost of the market basket in the base year.
B. rose 160% from the cost of the market basket in the base year.
C. equaled $160 in 1996.
D. equaled $160 in 1983.
A. rose 60% from the cost of the market basket in the base year.
B. rose 160% from the cost of the market basket in the base year.
C. equaled $160 in 1996.
D. equaled $160 in 1983.
answer
A. rose 60% from the cost of the market basket in the base year.
question
The substitution bias in the consumer price index refers to the idea that consumers ______ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket.
A. do not change; under−estimates
B. do not change; over−estimates
C. change; over−estimates
D. change; under−estimates
A. do not change; under−estimates
B. do not change; over−estimates
C. change; over−estimates
D. change; under−estimates
answer
C. change; over−estimates
question
The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ______ quality increases. This causes the CPI to ______ the cost of the market basket.
A. not; overstate
B. also; understate
C.not; understate
D.also; overstate
A. not; overstate
B. also; understate
C.not; understate
D.also; overstate
answer
A. not; overstate
question
In 2018, the government of Venezuela raised the minimum wage by 5,900 percent, but an article in the Economist quoted one Venezuelan as saying that on his wages as a building worker, "you go a day and half a week without eating." He was able to buy far less with his higher wages than he had been able to buy with his wages a few years before.
Source: "Having Wrecked the Economy, Venezuela's Rulers See No Reason to Change," Economist, December 13, 2018.
Why would the minimum wage in Venezuela buy so little despite having been raised by so much?
A. With the extra purchasing power from the wage increase, prices would fall and they would experience deflationary conditions.
B. Even though their wages were increasing by 5,900 percent, prices were increasing by more.
C. They would not be able to spend the extra money and instead need to hold as much paper money as possible.
D. The wage increase would not be enough to offset the redistribution of income that occurred during the hyperinflation.
Source: "Having Wrecked the Economy, Venezuela's Rulers See No Reason to Change," Economist, December 13, 2018.
Why would the minimum wage in Venezuela buy so little despite having been raised by so much?
A. With the extra purchasing power from the wage increase, prices would fall and they would experience deflationary conditions.
B. Even though their wages were increasing by 5,900 percent, prices were increasing by more.
C. They would not be able to spend the extra money and instead need to hold as much paper money as possible.
D. The wage increase would not be enough to offset the redistribution of income that occurred during the hyperinflation.
answer
B. Even though their wages were increasing by 5,900 percent, prices were increasing by more.
question
What is the real average hourly wage in 2009?'
A. $7.92
B. $8.21
C. $17.42
D. $8.61
A. $7.92
B. $8.21
C. $17.42
D. $8.61
answer
B. $8.21 ($17.00/207 X 100)
question
What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and 2010?
A.Both real and nominal average hourly earnings increased.
B.Both real and nominal average hourly earnings decreased.
C. Real average hourly earnings decreased and nominal average hourly earnings increased.
D. Real average hourly earnings increased and nominal average hourly earnings decreased.
A.Both real and nominal average hourly earnings increased.
B.Both real and nominal average hourly earnings decreased.
C. Real average hourly earnings decreased and nominal average hourly earnings increased.
D. Real average hourly earnings increased and nominal average hourly earnings decreased.
answer
A.Both real and nominal average hourly earnings increased.
question
If inflation is expected to increase,
A. the real interest rate will increase.
B. the nominal interest rate will remain the same.
C. the nominal interest rate will increase.
D. the nominal interest rate will decrease.
A. the real interest rate will increase.
B. the nominal interest rate will remain the same.
C. the nominal interest rate will increase.
D. the nominal interest rate will decrease.
answer
C. the nominal interest rate will increase.
question
If the economy is experiencing deflation,
A. the nominal interest rate will be lower than the real interest rate.
B. high nominal interest rates inflict serious losses on both household and business borrowers.
C. the nominal interest rate will be equal to the real interest rate.
D. the nominal interest rate will be higher than the real interest rate.
A. the nominal interest rate will be lower than the real interest rate.
B. high nominal interest rates inflict serious losses on both household and business borrowers.
C. the nominal interest rate will be equal to the real interest rate.
D. the nominal interest rate will be higher than the real interest rate.
answer
A. the nominal interest rate will be lower than the real interest rate.
question
Suppose you were borrowing money to buy a car. Consider the following situations.
Suppose the interest rate on your car loan is 16.00% and the inflation rate is 15.00% Calculate the real interest rate
Suppose the interest rate on your car loan is 16.00% and the inflation rate is 15.00% Calculate the real interest rate
answer
1%
question
Suppose you were borrowing money to buy a car. Consider the following situations.
Situation 2: Suppose the interest rate on your car loan is
6.00% and the inflation rate is 3.00% Calculate the real interest rate.
Situation 2: Suppose the interest rate on your car loan is
6.00% and the inflation rate is 3.00% Calculate the real interest rate.
answer
3%
question
During the late nineteenth century in the United States, many farmers borrowed heavily to buy land. During most of the period between 1870 and the mid-1890s, the United States experienced mild deflation. Many farmers engaged in political protests during these years, and deflation was often a subject of their protests.
Why would farmers have felt burdened by deflation during this period?
A. During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.
B. During deflationary periods, the nominal interest rate exceeds the real interest rate, and the real cost of borrowing falls.
C. During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing falls.
D. During deflationary periods, the nominal interest rate exceeds the real interest rate, and the real cost of borrowing increases.
Why would farmers have felt burdened by deflation during this period?
A. During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.
B. During deflationary periods, the nominal interest rate exceeds the real interest rate, and the real cost of borrowing falls.
C. During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing falls.
D. During deflationary periods, the nominal interest rate exceeds the real interest rate, and the real cost of borrowing increases.
answer
A. During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.
question
During the spring of 2015, the United Kingdom experienced a brief period of deflation. According to an article in the Wall Street Journal, "The U.K.'s history of sticky and hard-to-control inflation suggests that a short period of falling prices will be taken as a reprieve for consumers, not as a signal to defer purchases."
Source: Richard Barley, "U.K. Deflation More Curiosity Than Concern," Wall Street Journal, May 19, 2015.
Consumers could see deflation as a "signal to defer purchases" because if deflation is expected to continue,
A. prices would be higher in the future.
B. producers may increase product quality in the future.
C. producers may offer more to choose from in the future.
D. prices would be lower in the future.
Source: Richard Barley, "U.K. Deflation More Curiosity Than Concern," Wall Street Journal, May 19, 2015.
Consumers could see deflation as a "signal to defer purchases" because if deflation is expected to continue,
A. prices would be higher in the future.
B. producers may increase product quality in the future.
C. producers may offer more to choose from in the future.
D. prices would be lower in the future.
answer
D. prices would be lower in the future.
*consumers may delay buying until prices fall further, so current lower prices would not have the ususal effect.
*consumers may delay buying until prices fall further, so current lower prices would not have the ususal effect.
question
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%.
Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation? (Mark all that apply.)
A. Borrowers gain from a lower real interest rate.
B. Borrowers lose from a lower real interest rate.
C. Lenders lose from a lower real interest rate.
D. Lenders gain from a lower real interest rate.
Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation? (Mark all that apply.)
A. Borrowers gain from a lower real interest rate.
B. Borrowers lose from a lower real interest rate.
C. Lenders lose from a lower real interest rate.
D. Lenders gain from a lower real interest rate.
answer
A. Borrowers gain from a lower real interest rate.
&
C. Lenders lose from a lower real interest rate.
&
C. Lenders lose from a lower real interest rate.
question
What is the rule of 70?
The rule of 70
A. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to quadruple.
B. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to increase by two hundred percent.
C. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.
D. states when an individual can be eligible for full social security benefits.
The rule of 70
A. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to quadruple.
B. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to increase by two hundred percent.
C. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.
D. states when an individual can be eligible for full social security benefits.
answer
C. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.
question
If real GDP per capita grows at a rate of
6.6% per year, it will take how many years to double?
6.6% per year, it will take how many years to double?
answer
10.6 (70/6.6 x 100)
question
The two key factors that cause labor productivity to increase over time are
A. the quantity of capital per hour worked and the level of technology.
B. better environmental standards and stricter labor laws.
C. the decline in unionization and slacking of labor laws.
D. the quantity of labor per hour worked and the level of technology.
A. the quantity of capital per hour worked and the level of technology.
B. better environmental standards and stricter labor laws.
C. the decline in unionization and slacking of labor laws.
D. the quantity of labor per hour worked and the level of technology.
answer
A. the quantity of capital per hour worked and the level of technology.
question
Potential real GDP is
A. the level of GDP attained when only some firms have excess capacity.
B. the level of GDP attained when most firms are producing at capacity and unemployment is low.
C. the level of GDP attained when all firms have excess capacity.
D. the level of GDP attained when all firms are producing at capacity.
A. the level of GDP attained when only some firms have excess capacity.
B. the level of GDP attained when most firms are producing at capacity and unemployment is low.
C. the level of GDP attained when all firms have excess capacity.
D. the level of GDP attained when all firms are producing at capacity.
answer
D. the level of GDP attained when all firms are producing at capacity.
question
potential real GDP
A. grows over time
B. Declines over time
C. stays the same
A. grows over time
B. Declines over time
C. stays the same
answer
A. grows over time
question
An article in the Wall Street Journal notes that "raising productivity in the long run is the most effective way to elevate standards of living."
Source: Greg Ip, "Politicians Should Pay Heed to Productivity Problem," Wall Street Journal, July 22, 2015.
The claim of this article is
A. consistent with economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
B. faulty because it assumes that productivity and standards of living are related.
C. consistent with economic theory that explains that short-run economic growth is dependent on increases in real GDP per capita.
D. faulty because it assumes that the same factors influence economies everywhere.
Source: Greg Ip, "Politicians Should Pay Heed to Productivity Problem," Wall Street Journal, July 22, 2015.
The claim of this article is
A. consistent with economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
B. faulty because it assumes that productivity and standards of living are related.
C. consistent with economic theory that explains that short-run economic growth is dependent on increases in real GDP per capita.
D. faulty because it assumes that the same factors influence economies everywhere.
answer
A. consistent with economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
question
The high point of economic activity is called
answer
peak
question
The low point of economic activity is called
answer
trough
question
The period between the high point of economic activity and the following low point is called
answer
recession
question
The period between the low point of economic activity and the following high point is called
answer
expansion
question
Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate?
A. The unemployment rate increases and the inflation rate increases during expansions.
B. The unemployment rate increases and the inflation rate falls during expansions.
C. The unemployment rate falls and the inflation rate falls during recessions.
D. The unemployment rate increases and the inflation rate falls during recessions.
A. The unemployment rate increases and the inflation rate increases during expansions.
B. The unemployment rate increases and the inflation rate falls during expansions.
C. The unemployment rate falls and the inflation rate falls during recessions.
D. The unemployment rate increases and the inflation rate falls during recessions.
answer
D. The unemployment rate increases and the inflation rate falls during recessions.
question
Why might the unemployment rate continue to rise during the early stages of a recovery?
A. Employment growth may be slow relative to the growth in the labor force.
B. The number of discouraged workers may continue to increase.
C. Some firms continue to operate well below their capacity even after a recession has ended.
D.Because both (a) and (c) are true.
A. Employment growth may be slow relative to the growth in the labor force.
B. The number of discouraged workers may continue to increase.
C. Some firms continue to operate well below their capacity even after a recession has ended.
D.Because both (a) and (c) are true.
answer
D.Because both (a) and (c) are true.
question
What is the key idea in the aggregate expenditure macroeconomic model?
The key idea in the aggregate expenditure model is that
A. long run economic growth is determined by the level of aggregate expenditure.
B. in any particular year, the inflation rate is determined only by the level of aggregate expenditure.
C. in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
D. in any particular year, the level of potential real GDP is determined by the level of aggregate expenditure.
The key idea in the aggregate expenditure model is that
A. long run economic growth is determined by the level of aggregate expenditure.
B. in any particular year, the inflation rate is determined only by the level of aggregate expenditure.
C. in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
D. in any particular year, the level of potential real GDP is determined by the level of aggregate expenditure.
answer
C. in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
question
What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?
A. Inventories decrease, GDP decreases, and employment increases.
B. Inventories increase, GDP increases, and employment decreases.
C. Inventories decrease, GDP increases, and employment increases.
D. Inventories increase, GDP increases, and employment increases.
A. Inventories decrease, GDP decreases, and employment increases.
B. Inventories increase, GDP increases, and employment decreases.
C. Inventories decrease, GDP increases, and employment increases.
D. Inventories increase, GDP increases, and employment increases.
answer
C. Inventories decrease, GDP increases, and employment increases.
question
Macroeconomic equilibrium occurs where
A. total spending, or aggregate expenditure, equals total production, or GDP.
B. total production, or GDP, equals total planned investment.
C. consumption equals investment and investment equals government expenditure.
D. the unemployment rate is zero.
A. total spending, or aggregate expenditure, equals total production, or GDP.
B. total production, or GDP, equals total planned investment.
C. consumption equals investment and investment equals government expenditure.
D. the unemployment rate is zero.
answer
A. total spending, or aggregate expenditure, equals total production, or GDP.
question
What are the four main determinants of investment?
A. Disposable income, interest rates, taxes and cash flow.
B. Expectations of future profitability, interest rates, taxes and cash flow.
C.Expectations of future profitability, interest rates, disposable income and cash flow.
D.Expectations of future profitability, interest rates, exchange rate and cash flow.
A. Disposable income, interest rates, taxes and cash flow.
B. Expectations of future profitability, interest rates, taxes and cash flow.
C.Expectations of future profitability, interest rates, disposable income and cash flow.
D.Expectations of future profitability, interest rates, exchange rate and cash flow.
answer
B. Expectations of future profitability, interest rates, taxes and cash flow.
question
How would an increase in interest rates affect investment?
A. Real investment spending remains unchanged.
B. Real investment spending declines.
C. Real investment spending increases.
D. Real investment spending may increase, decrease or remain the same depending on the rate of inflation
A. Real investment spending remains unchanged.
B. Real investment spending declines.
C. Real investment spending increases.
D. Real investment spending may increase, decrease or remain the same depending on the rate of inflation
answer
B. Real investment spending declines.
question
An economics student raises the following objection:
"The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account."
The problem with the student's argument is which of the following?
A. The student is confusing saving with investment.
B.Investment is not related to the interest rate.
C.Savings accounts do not earn interest.
D.Higher interest rates are bad for savers.
"The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account."
The problem with the student's argument is which of the following?
A. The student is confusing saving with investment.
B.Investment is not related to the interest rate.
C.Savings accounts do not earn interest.
D.Higher interest rates are bad for savers.
answer
A. The student is confusing saving with investment.
question
Which of the following will raise consumer expenditures?
A. a general decline in housing prices
B. an increase in the price level
C. an increase in expected future income
D.an increase in interest rates
A. a general decline in housing prices
B. an increase in the price level
C. an increase in expected future income
D.an increase in interest rates
answer
C. an increase in expected future income
question
What is the meaning of the 45° line in the 45°-line diagram?
In the 45°-line diagram, the 45° line shows
A. the equality of real consumption spending and real GDP.
B. real aggregate expenditure for varying levels of real GDP.
C. all the points where aggregate expenditure equals real GDP.
D. real consumption spending for varying levels of real GDP.
In the 45°-line diagram, the 45° line shows
A. the equality of real consumption spending and real GDP.
B. real aggregate expenditure for varying levels of real GDP.
C. all the points where aggregate expenditure equals real GDP.
D. real consumption spending for varying levels of real GDP.
answer
C. all the points where aggregate expenditure equals real GDP.
question
On a 45°-line diagram (or Keynesian Cross), the horizontal axis measures real GDP, while the vertical axis measures real aggregate expenditure.
The aggregate expenditures line will be
A. upward sloping with a steeper slope than the 45°-line.
B. upward sloping with a flatter slope than the 45°-line.
C. downward sloping.
D. horizontal at the equilibrium level of aggregate expenditures.
The aggregate expenditures line will be
A. upward sloping with a steeper slope than the 45°-line.
B. upward sloping with a flatter slope than the 45°-line.
C. downward sloping.
D. horizontal at the equilibrium level of aggregate expenditures.
answer
B. upward sloping with a flatter slope than the 45°-line.
question
The macroeconomic equilibrium will be
A. where the AE line intersects the 45°-line.
B. anywhere on the 45°-line.
C. at the graph's origin.
D. anywhere on the AE line.
A. where the AE line intersects the 45°-line.
B. anywhere on the 45°-line.
C. at the graph's origin.
D. anywhere on the AE line.
answer
A. where the AE line intersects the 45°-line.
question
A Federal Reserve publication notes that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions."
Source: Jeremy M. Piger, "Is the Business Cycle Still an Inventory Cycle?," Economic Synopses, Federal Reserve Bank of St. Louis, No. 2, 2005.
"Shedding of unwanted inventories" means that firms are
A. disposing of inventories.
B. selling their unplanned increases in inventories from previous time periods.
C. writing off their stocks of inventories.
D. shipping inventories overseas.
Source: Jeremy M. Piger, "Is the Business Cycle Still an Inventory Cycle?," Economic Synopses, Federal Reserve Bank of St. Louis, No. 2, 2005.
"Shedding of unwanted inventories" means that firms are
A. disposing of inventories.
B. selling their unplanned increases in inventories from previous time periods.
C. writing off their stocks of inventories.
D. shipping inventories overseas.
answer
B. selling their unplanned increases in inventories from previous time periods.
question
Inventories are unwanted when
A. expenditures are too low to keep pace with inventories.
B. expenditures are too high to keep pace with inventories.
C. the economy is in an expansion.
D. new product lines are introduced.
A. expenditures are too low to keep pace with inventories.
B. expenditures are too high to keep pace with inventories.
C. the economy is in an expansion.
D. new product lines are introduced.
answer
A. expenditures are too low to keep pace with inventories.
question
Shedding inventories would lead to a decline in GDP because
A. investment in fixed goods will fall, which reduces GDP.
B. net exports will fall, which reduces GDP.
C. consumers will buy fewer goods, which reduces GDP.
D. current production will decease as inventories are "shed," which reduces GDP.
A. investment in fixed goods will fall, which reduces GDP.
B. net exports will fall, which reduces GDP.
C. consumers will buy fewer goods, which reduces GDP.
D. current production will decease as inventories are "shed," which reduces GDP.
answer
D. current production will decease as inventories are "shed," which reduces GDP.
question
Which of the following is the formula for the multiplier?
A. 1/1−MPC
B. MPC
C. 1−MPC
D. 1/MPC
A. 1/1−MPC
B. MPC
C. 1−MPC
D. 1/MPC
answer
A. 1/1−MPC
question
Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason?
A. The formula ignores the impact of an increase in GDP on consumption.
B. The formula ignores the impact of an increase in GDP on inflation.
C. The formula ignores the impact of an increase in GDP on the interest rate.
D. The formula ignores the impact of an increase in GDP on imports.
A. The formula ignores the impact of an increase in GDP on consumption.
B. The formula ignores the impact of an increase in GDP on inflation.
C. The formula ignores the impact of an increase in GDP on the interest rate.
D. The formula ignores the impact of an increase in GDP on imports.
answer
A. The formula ignores the impact of an increase in GDP on consumption.
question
Would a larger multiplier lead to more severe recessions or less severe recessions?
A. A larger multiplier means that large changes in spending lead to small changes in GDP, and thus recessions would be more severe.
B. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.
C. A larger multiplier means that large changes in spending lead to small changes in GDP, and thus recessions would be less severe.
D. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be less severe
A. A larger multiplier means that large changes in spending lead to small changes in GDP, and thus recessions would be more severe.
B. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.
C. A larger multiplier means that large changes in spending lead to small changes in GDP, and thus recessions would be less severe.
D. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be less severe
answer
B. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.
question
An MPC equal to 0 implies a multiplier of 1, meaning that a $1 increase in autonomous expenditures would increase real GDP by only $1.
Why does an MPC of 0 result in no multiplier effect? Explain your answer using the logic of the multiplier process.
A. An MPC of 0 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
B. An MPC equal to 0 indicates that consumers are drawing more from their savings in order to increase consumption.
C. When the MPC is 0, any additional income does not induce any additional saving by households.
D. When the MPC is 0, any additional income does not induce any additional consumption spending.
Why does an MPC of 0 result in no multiplier effect? Explain your answer using the logic of the multiplier process.
A. An MPC of 0 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
B. An MPC equal to 0 indicates that consumers are drawing more from their savings in order to increase consumption.
C. When the MPC is 0, any additional income does not induce any additional saving by households.
D. When the MPC is 0, any additional income does not induce any additional consumption spending.
answer
D. When the MPC is 0, any additional income does not induce any additional consumption spending.
question
Conversely, an MPC equal to 1 implies an infinite multiplier, meaning that a $1 increase in autonomous expenditures would increase real GDP by an infinite amount.
Why does an MPC of 1 result in an infinite multiplier? Explain your answer using the logic of the multiplier process.
A. An MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
B. When the MPC is 1, any additional income does not induce any additional saving by households.
C. When the MPC is 1, any additional income does not induce any additional consumption spending.
D. An MPC equal to 1 ignores real-world complications and as such overstates the true value of the multiplier.
Why does an MPC of 1 result in an infinite multiplier? Explain your answer using the logic of the multiplier process.
A. An MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
B. When the MPC is 1, any additional income does not induce any additional saving by households.
C. When the MPC is 1, any additional income does not induce any additional consumption spending.
D. An MPC equal to 1 ignores real-world complications and as such overstates the true value of the multiplier.
answer
A. An MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
question
Suppose booming economies in the BRIC nations (Brazil, Russia, India, and China) causes net exports (NX) to rise by $ billion in the United States.
If the MPC is 0.75 the change in equilibrium GDP will be
If the MPC is 0.75 the change in equilibrium GDP will be
answer
600 billion
question
Which of the following would shift the aggregate expenditure line upward?
A. A decrease in expected future income
B. A decrease in government purchases
C. An increase in interest rates
D. An increase in foreign real GDP
A. A decrease in expected future income
B. A decrease in government purchases
C. An increase in interest rates
D. An increase in foreign real GDP
answer
D. An increase in foreign real GDP
question
A decrease in the interest rate would cause the
A. aggregate expenditure line to shift upward, increasing equilibrium real GDP.
B. aggregate expenditure line to shift downward, increasing equilibrium real GDP.
C. aggregate expenditure line to shift downward, decreasing equilibrium real GDP.
D. aggregate expenditure line to shift upward, decreasing equilibrium real GDP.
A. aggregate expenditure line to shift upward, increasing equilibrium real GDP.
B. aggregate expenditure line to shift downward, increasing equilibrium real GDP.
C. aggregate expenditure line to shift downward, decreasing equilibrium real GDP.
D. aggregate expenditure line to shift upward, decreasing equilibrium real GDP.
answer
A. aggregate expenditure line to shift upward, increasing equilibrium real GDP.
question
GDP
answer
the market value of all final goods and services produced in a country during a period of time, typically one year
question
Why is GDP not a perfect measure of well-being?
answer
-- the value of leisure is not included in GDP
-- GDP is not adjusted for pollution or other negative effects
-- GDP is not adjusted for changes in crime & other social problems
-- GDP measures the size of the pie, but not how the pie is divided
-- GDP is not adjusted for pollution or other negative effects
-- GDP is not adjusted for changes in crime & other social problems
-- GDP measures the size of the pie, but not how the pie is divided
question
personal consumption
answer
spending by households on goods & services
question
investment spending
answer
spending by firms on new factories, office buildings, additions to inventories plus spending by households & by firms on new houses
question
government consumption & gross inventories/government purchases
answer
spending by federal, state, & local governments on goods & services
question
Net exports of goods and services
answer
exports - imports
question
what are two types of production not included in GDP?
answer
household production
--goods & services people produce for themselves
underground economy
--buying & selling of goods & services that is concealed from the government or because the goods & services are illegal
--goods & services people produce for themselves
underground economy
--buying & selling of goods & services that is concealed from the government or because the goods & services are illegal
question
Gini index
answer
the gini index measures the degree of inequality in the distribution of family income in a country. The more equal a country's income distribution is, the lower their gini index. If income were distributed perfectly, the index would be 0, if income were distributed w perfect inequality, the index would be 100
question
nominal GDP
answer
value of goods and services measured at current year prices
nominal GDP (2020)= price (2020) x quantity (2020)
*nominal GDP can be deceptive because it doesnt tell us what happened to the quantity
nominal GDP (2020)= price (2020) x quantity (2020)
*nominal GDP can be deceptive because it doesnt tell us what happened to the quantity
question
read GDP
answer
the value of final goods and services evaluated at base-year prices
real GDP (2020)= price (2012) x quantity (2020)
* real GDP is a better measure of output of an economy over time
real GDP (2020)= price (2012) x quantity (2020)
* real GDP is a better measure of output of an economy over time
question
If the quantity of final goods and services produced decreased, could nominal GDP increase? Could real GDP increase?
answer
nominal GDP could increase, real gdp cannot
question
which could cause nominal GDP to increase, but real GDP to go down?
answer
quantity must go down, price must go up
question
household survery
answer
current population survey of 60,000 house-holds employment status of everyone older than 16, gives you the unemployment rate
question
establishment survey
answer
samples 300,000 business establishments
person employed on company payroll estimates the number of jobs
person employed on company payroll estimates the number of jobs
question
what criteria do you have to meet to be considered unemployed?
answer
1. dont have a job
2. available for work
3. actively looked for a job in the last 4 weeks
2. available for work
3. actively looked for a job in the last 4 weeks
question
calculation for unemployment rate
answer
unemployed/labor force x 100
labor force: employed + unemployed
labor force: employed + unemployed
question
reasons official unemployment rate may be understate the true unemployment rate
answer
discouraged workers
involuntary part-time workers
involuntary part-time workers
question
reasons official unemployment rate may overstate the true unemployment rate
answer
some people claim to be actively looking for work, but are not (to remain eligible for government payments to the unemployed)
jobs in underground economy
jobs in underground economy
question
what are the tree types of unemployment?
answer
1. frictional
2. structural
3. cyclical
2. structural
3. cyclical
question
frictional unemployment
answer
short-term unemployment that arises from the process of matching workers with jobs
cause: normal labor market turnover of business contracting & expanding & people entering & exiting the labor force creating search processes of matching worker with jobs
cause: normal labor market turnover of business contracting & expanding & people entering & exiting the labor force creating search processes of matching worker with jobs
question
structural unemployment
answer
unemployment arising from a persistent mismatch between the skills or attributes of workers & the requirements of the job
cause: structural changes n the economy like technological changes & international competition cause a mismatch between skills of workers & job requirements
cause: structural changes n the economy like technological changes & international competition cause a mismatch between skills of workers & job requirements
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cyclical unemployment
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unemployment that rises during economic downturns and falls when the economy improves
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natural rate of unemployment
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normal rate of unemployment consisting of both frictional & structural unemployment
or when cyclical unemployment is at 0%
*natural rate of unemployment is never 0 due to frictional & structural unemployment
or when cyclical unemployment is at 0%
*natural rate of unemployment is never 0 due to frictional & structural unemployment
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if cyclical unemployment is eliminated in the economy, then
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the economy is considered to be at full employment
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employment population ratio
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(employment/working age population) x 100
drawback: workers who drop out of the labor market are no longer counted as unemployed
employment population ration measures the percentage of working age population that has jobs
drawback: workers who drop out of the labor market are no longer counted as unemployed
employment population ration measures the percentage of working age population that has jobs
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labor force participation rate
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labor force/ working age population x 100
percentage of the working age population in the labor force
percentage of the working age population in the labor force
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inflation rate
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the percentage increase in the price level from one year to the next
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Consumer Price Index (CPI)
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a measure of the average change overtime in the prices of a typical urban family of four pays for goods & services they purchase
an index comparing the cost of buying the market basket of goods & services in the current year to the cost of buying that same market basket in the base year
an index comparing the cost of buying the market basket of goods & services in the current year to the cost of buying that same market basket in the base year
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GDP deflator
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a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
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producer price index
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an average of the prices received by producers of goods & services at all stages of the production process
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personal consumption expenditures price index
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measure of the price level that is similar to the GDP deflator except it includes only the prices of goods & services in GDP from the consumption category
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inflation rate equation
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CPI this year - CPI last year / CPI last year x 100
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How does the substitution bias overstate the cost of living & inflation rate?
answer
using a fixed market basket, the CPI assumes that consumers do not buy less of a good whose relative price rises & more of a good or services who relative prices falls
by substituting into goods & services whose relative prices have decreased, the cost of living of the consumer increases less than indicated by the CPI
by substituting into goods & services whose relative prices have decreased, the cost of living of the consumer increases less than indicated by the CPI
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what shape for the demand curve of the goods & services in the market basket does the CPI implicitly assume?
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a vertical line in the middle of the graph because CPI is a fixed market basket
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how do you correct the effects of inflation
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divide the nominal wages/ price index (CPI) x 100
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nominal interest rate
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the stated interest rate on a loan
real interest rate + inflation rate
real interest rate + inflation rate
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real interest rate
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nominal interest rate - expected inflation
measures the true cost of borrowing & the true true return from lending
measures the true cost of borrowing & the true true return from lending
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is it possible for the nominal interest rate to be less than the real interest rate?
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yes, inflation must be negative (deflation)
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problems caused by inflation
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the wrong thing people always thing is that inflation only increases the cost of living, but not that inflation also increases nominal income. Inflation raises, in general, both the cost of living & nominal incomes
example: if the price of a big increases, that money you pay must be distributed as income in other places
example: if the price of a big increases, that money you pay must be distributed as income in other places
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problems caused by inflation
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1. people on fixed incomes will experience a decline in real purchasing power
2. firms that print catalogs or menus listing prices will have to update them more frequently
3. unanticipated inflation will redistribute income between lenders & borrowers
2. firms that print catalogs or menus listing prices will have to update them more frequently
3. unanticipated inflation will redistribute income between lenders & borrowers
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when actual inflation is less than expected:
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lenders gain & borrowers lose
example:
suppose actual inflation=0% instead of the expected 5%
actual real interest rate= 7%-0%= 7%
lenders are now receiving a nominal interest rate of7% instead of the expected 5%
example:
suppose actual inflation=0% instead of the expected 5%
actual real interest rate= 7%-0%= 7%
lenders are now receiving a nominal interest rate of7% instead of the expected 5%
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how to calculate nominal interest rate
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real interest rate + inflation rate
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how to calculate real interest rate
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nominal interest rate - inflation rate
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if actual inflation is greater than the expected inflation rate
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borrowers gain, lenders lose
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suppose you borrow $1000 at an interest rate of 5%. if the expected real interest rate is 2% then the rate of inflation over the upcoming year that would be beneficial to you would be a rate of
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expected inflation: 5%-2%= 3%
anything greater than 3%
anything greater than 3%
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problems with deflation
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-consumers reduce consumption spending, waiting for even lower prices
-increases the burden on borrowers, if the deflation is unexpected, because it increases the real interest rate
-increases the burden on borrowers, if the deflation is unexpected, because it increases the real interest rate
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long-run economic growth
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the process by which rising productivity increases the average standard of living
"best" measure of standard of living is real GDP per capital
"best" measure of standard of living is real GDP per capital
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"best" measure of standard of living
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GDP per capita
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potential GDP
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the level of real GDP attained when all firms are producing at capacity
it is NOT maximum output, but output when operating on normal hours, using the normal workforce
potential GDP increases over time as the labor force grows, new factories & office buildings are built. new machinery, technological changes take place
it is NOT maximum output, but output when operating on normal hours, using the normal workforce
potential GDP increases over time as the labor force grows, new factories & office buildings are built. new machinery, technological changes take place
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financial system
answer
the financial system consists of financial markets & financial intermediaries
the financial system channels funds from saves to borrowers & channels returns on the borrowed funds back to savers
*****the financial system is important for economic growth as it provides funds to firms for capital investments, training workers, & new tech
the financial system channels funds from saves to borrowers & channels returns on the borrowed funds back to savers
*****the financial system is important for economic growth as it provides funds to firms for capital investments, training workers, & new tech
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business cycle
answer
Alternating periods of economic expansion and economic recession
sequence: expansion, peak, recession, through
sequence: expansion, peak, recession, through
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****inflation usually increases with expansion & decreases with recession
*****unemployment falls with expansion & increases with recession, other than at the beginning of an expansion
*****unemployment falls with expansion & increases with recession, other than at the beginning of an expansion
answer
...
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Aggregate Expenditure Model
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macroeconomics model that focuses on the short-run relationships between total spending & total production
changes in spending is what causes changes in the short run in real GDP & employment
changes in spending is what causes changes in the short run in real GDP & employment
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how aggregate expenditure model works:
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if total spending is less than the total production, inventories increase, decrease in production, decrease in employment
if total spending is more than the total production, inventories increase, employment increases
if total spending is more than the total production, inventories increase, employment increases
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what does the aggregate expenditure model seek to explain?
answer
the AE model does look at short-run model of the economy to explain the business cycle
also explains the cyclical cycle
also explains the cyclical cycle
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what are the four factors that determine consumer spending?
answer
1. current disposable income (+)
2. household wealth (+)
3. expected future income (+)
4. interest rates (-)
2. household wealth (+)
3. expected future income (+)
4. interest rates (-)
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3 factors that determine investment spending?
answer
1. expectations of future profitability (+)
2. interest rates (-)
3. business taxes (-)
2. interest rates (-)
3. business taxes (-)
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government puchases
answer
spending by federal, state, & local governments in goods & services (+)
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factor that determine net exports
answer
growth rate of the U.S. relative to the growth rate of the GDP in other counties (typically a + in our case)
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consumption function
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the relationship between consumption spending and disposable income
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Marginal Propensity to Consume (MPC)
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the slope of the consumption function: the amount by which consumption spending changes when disposable income changes
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multiplier effect
answer
the process by which a small change in autonomous expenditures leads to a larger change in real GDP
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multiplier effect equation
answer
1/(1-MPC)
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summarizing the multiplier effect
answer
1. the multiplier effect occurs both for an increase & decrease in planned aggregate expenditures
2. because the multiplier is greater than 1, the economy is sensitive to changes in autonomous expenditure
3. the larger the MPC, the larger the value of the multiplier
2. because the multiplier is greater than 1, the economy is sensitive to changes in autonomous expenditure
3. the larger the MPC, the larger the value of the multiplier
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