FirstEXAM Macro

Chapter 5 Introduction to Macroeconomics
5.1 Macroeconomic Concerns

1 Multiple Choice
1) Which of the following is NOT a topic studied in Macroeconomics?

A) gross domestic product B) the unemployment rate
C) the price of IBM computers D) the inflation rate
Answer: C
Diff: 1
Topic: Macroeconomic Concerns
Skill: Conceptual
AACSB: Reflective Thinking
2) Which of the following is a topic studied in Macroeconomics?

A) gross domestic product B) the wage of auto workers
C) the price of IBM computers D) the amount of pizza produced
Answer: A
Diff: 1
Skill: Conceptual
3) Which of the following is a topic studied in Macroeconomics?

A) the functioning of individual industries
B) aggregate behavior of households and industries
C) the behavior of individual households
D) the decision-making behavior of individual business firms
Answer: B
Diff: 1
Skill: Conceptual
4) Prices that do not always adjust rapidly to maintain equality between quantity supplied and
quantity demanded are
A) administered prices. B) sticky prices.
C) regulatory prices. D) market prices.
Answer: B
Diff: 1
Skill: Definition
116
5) The demand for corn has increased in May without any change in supply. Eight months later
there still has been no change in corn prices. This is an example of a
A) price floor. B) price control.
C) sticky price. D) macroeconomic price.
Answer: C
Diff: 2
Skill: Conceptual
6) The demand for massage therapists declined in the spring of 2007, but the starting wages paid
to massage therapists was still the same at the end of 2007. This is an example of a
A) sticky price. B) flexible price.
C) highly regulated market. D) price control.
Answer: A
Diff: 2
Skill: Conceptual
7) An increase in the overall price level is known as

A) deflation. B) recession. C) inflation. D) stagflation.
Answer: C
Diff: 1
Skill: Definition
8) Aggregate behavior is
A) the behavior of each household and firm.
B) the behavior of each individual.
C) the behavior of all households and firms together.
D) none of the above.
Answer: C
Diff: 2
Skill: Definition
9) Inflation is a(n)
A) decrease in the overall price level.
B) decrease in the overall level of economic activity.
C) increase in the overall price level.
D) increase in the overall level of economic activity.
Answer: C
Diff: 1
Skill: Definition
117
10) Deflation occurs when
A) the average price level declines. B) economic activity declines.
C) the economic growth rate declines. D) the unemployment rate declines.
Answer: A
Diff: 2
Skill: Definition
11) A period of very rapid increase in the overall price level is known as
A) stagnation. B) hyperinflation.
C) stagflation. D) depression.
Answer: B
Diff: 1
Skill: Definition
12) The trend of the economy is

A) the long run growth path of the economy.
B) the long run inflation rate.
C) the long run unemployment rate.
D) the short run production capacity of an economy.
Answer: A
Diff: 1
Skill: Definition
13) The term business cycle refers to the

A) short-term ups and downs in the price level.
B) long-term trends in the price level.
C) short-term ups and downs in the level of economic activity.
D) long-term trends in the level of economic activity.
Answer: C
Diff: 1
Skill: Definition
14) A period during which aggregate output rises is known as a(n)

A) recession. B) inflation.
C) hyperinflation. D) expansion.
Answer: D
Diff: 1
Skill: Definition
15) A period when the economy shrinks is known as

A) a recession. B) a contraction.
C) a slump. D) all of the above.
Answer: D
Diff: 1
Skill: Definition
118
16) In a business cycle, a peak represents the end of ________ and a trough represents the end of
________.
A) an expansion; a recession B) a depression; an expansion
C) a trough; a peak D) a recession; an expansion
Answer: A
Diff: 1
Skill: Conceptual
17) In a business cycle, a peak represents the end of

A) an expansion. B) a depression. C) trough. D) a recession
Answer: A
Diff: 1
Skill: Conceptual
18) In a business cycle, a trough represents the end of

A) an expansion. B) an inflation. C) a peak D) a recession.
Answer: D
Diff: 1
Skill: Conceptual
19) It has become conventional to classify an economic downturn as a recession when aggregate
output declines for
A) three consecutive quarters. B) two consecutive quarters.
C) a year. D) six consecutive quarters.
Answer: B
Diff: 1
Skill: Fact
20) If the labor force is 500 and employment is 450, then the unemployment rate is
A) 100%. B) 90%. C) 10%. D) 0%.
Answer: C
Diff: 2
Skill: Analytic
21) A prolonged and deep recession is called

A) a business cycle. B) a depression.
C) a stagflation. D) hyperinflation.
Answer: B
Diff: 1
Skill: Definition
119
22) Between a trough and a peak, the economy goes through a(n)
A) recession. B) bust.
C) expansion. D) hyperinflation.
Answer: C
Diff: 1
Skill: Conceptual
23) Between a peak and a trough, the economy goes through a(n)
A) expansion. B) inflation. C) recession. D) boom.
Answer: C
Diff: 1
Skill: Conceptual
24) Unemployment means that

A) at the going wage rate, there are people who want to work but cannot find work.
B) people are not willing to work at the going wage rate.
C) there are some people who will not work at the going wage rate.
D) there is excess demand in the labor market.
Answer: A
Diff: 1
Skill: Definition
25) Unemployment implies that in the labor market

A) there is an excess supply of labor.
B) there is an excess demand for labor.
C) there are too few workers for the jobs available.
D) quantity demanded of labor exceeds quantity supplied.
Answer: A
Diff: 1
Skill: Conceptual
26) The unemployment rate equals

A) labor force/population. B) unemployed/employed.
C) (employed - unemployed)/labor force. D) (labor force - employed)/labor force.
Answer: D
Diff: 2
Skill: Definition
120
27) The unemployment rate equals
A) labor force/population. B) unemployed/employed.
C) (employed - unemployed)/labor force. D) unemployed/labor force.
Answer: D
Diff: 2
Skill: Definition
28) If the labor force is 50 million and 48 million are employed then the unemployment rate is:
A) 2%. B) 4%. C) 5%. D) 52%.
Answer: B
Diff: 2
Skill: Analytic
AACSB: Analytic Skills
29) If 20 million workers are unemployed and 180 million workers are employed, then the
unemployment rate is
A) 10%. B) 11.1%. C) 18%. D) 80%.
Answer: A
Diff: 2
Skill: Analytic
30) The period in the business cycle from a trough to peak is called a(n)
A) recession. B) expansion. C) slump. D) depression.
Answer: B
Diff: 1
Skill: Conceptual
31) If output is rising and unemployment is falling, the economy MUST be in a(n)
A) contraction. B) expansion.
C) depression. D) hyperinflationary period.
Answer: B
Diff: 1
Skill: Conceptual
32) The period in the business cycle from a peak to a trough is a(n)
A) recession. B) boom. C) expansion. D) inflation.
Answer: A
Diff: 1
Skill: Conceptual
121
33) Unemployment generally ________ during recessions and ________ during expansions.
A) falls; rises. B) falls; falls. C) rises; falls. D) rises; rises.
Answer: C
Diff: 1
Skill: Conceptual
34) Which of the following statements is FALSE?

A) The rate of change in economic activity is used to assess whether an economy is
expanding or contracting.
B) Short-term ups and downs in the economy are known as business cycles.
C) During a recession, output and employment are falling.
D) Business cycles are always symmetricthe length of an expansion is the same as the
length of a contraction.
Answer: D
Diff: 2
Skill: Conceptual
2 True/False
1) Macroeconomics is concerned with inflation or deflation, output growth and unemployment.

Answer: TRUE
Diff: 1
Skill: Conceptual
2) Macroeconomics is concerned with the market price and equilibrium quantity of each good or
service.
Answer: FALSE
Diff: 1
Skill: Conceptual
3) The employment rate is the number of people employed divided by number of people in the
labor force.
Answer: TRUE
Diff: 1
Skill: Definition
4) Hyperinflation and stagflation are two different names which refer to identical economic
conditions.
Answer: FALSE
Diff: 1
Skill: Definition
122
5) Macroeconomic behavior is the sum of all the microeconomic decisions made by individual
households and firms.
Answer: TRUE
Diff: 1
Skill: Conceptual
6) All business cycles are symmetricthe length of an expansion is the same as the length of a
recession.
Answer: FALSE
Diff: 1
Skill: Conceptual
7) The following is a correct order in a business cycle: recession, trough, peak, expansion.
Answer: FALSE
Diff: 1
Skill: Conceptual
8) A recession is usually associated with increasing unemployment.

Answer: TRUE
Diff: 1
Skill: Conceptual
9) An expansion is usually associated with rising price levels.

Answer: TRUE
Diff: 1
Skill: Conceptual
10) A recession is associated with a negative rate of growth of the economy.

Answer: TRUE
Diff: 1
Skill: Conceptual
123
5.2 The Components of the Macroeconomy
1 Multiple Choice
1) If the central bank decreases the money supply, it is conducting

A) monetary policy. B) supply-side policy.
C) fiscal policy. D) incomes policy.
Answer: A
Diff: 1
Topic: The Components of the Macroeconomy
Skill: Conceptual
2) If Congress increases government spending, it is using

A) monetary policy. B) supply-side policy.
C) fiscal policy. D) incomes policy.
Answer: C
Diff: 1
Skill: Conceptual
3) Government policies regarding taxes and expenditures are called

A) fiscal policy. B) income policies.
C) supply-side policy. D) monetary policy.
Answer: A
Diff: 1
Skill: Definition
4) The government implements fiscal policy when it changes

A) spending and/or interest rate. B) money supply and/or taxes.
C) taxes and/or spending. D) taxes and/or interest rate.
Answer: C
Diff: 1
Skill: Conceptual
5) The government wants to encourage consumer spending through cutting income taxes. This is
an example of
A) an incomes policy. B) a fiscal policy.
C) a supply-side policy. D) a monetary policy.
Answer: B
Diff: 1
Skill: Conceptual
124
6) The ________ can change the quantity of money in the economy.
A) Treasury Department
B) Federal Reserve
C) Congress
D) Office of the Comptroller of the Currency
Answer: B
Diff: 1
Skill: Fact
7) The Federal Reserve affecting the supply of money is known as

A) fiscal policy. B) monetary policy.
C) growth policy. D) supply side policy.
Answer: B
Diff: 1
Skill: Definition
8) Policies designed to affect the quantity of money are

A) fiscal policies. B) supply side or growth policies.
C) government spending policies. D) monetary policies.
Answer: D
Diff: 1
Skill: Definition
9) The diagram that shows the income received and payments made by each sector of the
economy is the
A) aggregate demand-aggregate supply diagram.
B) circular flow diagram.
C) income flow diagram.
D) income-production diagram.
Answer: B
Diff: 1
Skill: Definition
10) In the circular flow diagram, the different payments made by firms to households include
A) wages and profits. B) interest and taxes.
C) transfer payments and dividends. D) taxes and transfer payments.
Answer: A
Diff: 1
Skill: Conceptual
125
11) An example of a transfer payment is
A) an interest payment on a General Motorsʹ bond.
B) the added value of stock from the time it was bought to the time it was sold.
C) a Social Security retirement benefit.
D) the salary paid to a member of the armed forces.
Answer: C
Diff: 2
Skill: Conceptual
12) A transfer payment is

A) a bonus to get a worker to accept a transfer.
B) a cash payment made by the government to people who do not supply goods, services or
labor in exchange for the payment.
C) a cash payment for transferring a good from one person to another.
D) an in kind payment for working ʺoff the books.ʺ
Answer: B
Diff: 2
Skill: Definition
13) A household that spends less than it receives in income during a given period is
A) saving. B) dissaving.
C) running a deficit. D) receiving transfer payments.
Answer: A
Diff: 1
Skill: Conceptual
14) The major lesson of the circular flow diagram is that

A) saving must always be less than investment.
B) taxes must always be greater than government expenditures.
C) total income in the economy must always equal total spending.
D) tax receipts must be equal to transfer payments
Answer: C
Diff: 2
Skill: Conceptual
15) In which of the following markets are funds demanded and supplied?
A) the labor market B) the goods and services market
C) the money market D) the factor market
Answer: C
Diff: 1
Skill: Definition
126
16) In the goods-and-services market, households
A) only supply. B) only demand.
C) both supply and demand. D) neither supply nor demand.
Answer: B
Diff: 2
Skill: Conceptual
17) The demanders in the goods-and-services market are

A) households and business firms.
B) households, the government, and the rest of the world.
C) the government and business firms.
D) households, the government, business firms, and the rest of the world.
Answer: D
Diff: 2
Skill: Conceptual
18) In which basic market would DVDs be traded?

A) the goods and services market B) the money market
C) the labor market D) the factor market
Answer: A
Diff: 1
Skill: Conceptual
19) In the circular flow diagram, firms ________ labor and households ________ goods and
services.
A) demand; supply. B) demand; demand.
C) supply; demand. D) supply; supply.
Answer: B
Diff: 2
Skill: Conceptual
20) In the circular flow diagram, households demand ________ and supply ________.
A) labor; labor. B) goods; services.
C) goods and services; labor. D) labor; goods and services.
Answer: C
Diff: 2
Skill: Conceptual
127
21) Promissory notes issued by the federal government when it borrows money are known as
A) Treasury shares. B) Treasury stocks.
C) Treasury bonds. D) none of the above
Answer: C
Diff: 2
Skill: Definition
22) A promissory note issued by a corporation when it borrows money is a

A) share. B) corporate bond.
C) corporate dividend. D) stock.
Answer: B
Diff: 1
Skill: Definition
23) Dividends are

A) government profits distributed among bondholders.
B) corporate profits distributed among shareholders.
C) capital gains realized by stockholders.
D) promissory notes issued by corporations.
Answer: B
Diff: 1
Skill: Definition
24) Which of the following is a CORRECT statement?

A) Companies issue shares but donʹt issue bonds.
B) The government issues both bonds and shares.
C) Bondholders earn dividends but shareholders donʹt.
D) Shareholders earn dividends but bondholders donʹt.
Answer: D
Diff: 2
Skill: Conceptual
25) A capital gain is

A) a financial instrument that gives the holder a share in the ownership of a firm and
therefore the right to share in the profits of the firm.
B) the portion of a corporationʹs profits that the firm pays out each period to its
shareholders.
C) an increase in the value of an asset over the price initially paid for it.
D) the difference between an individualʹs economic income and money income.
Answer: C
Diff: 2
Skill: Definition
128
26) An increase in the value of an asset over the price initially paid for it is a
A) dividend. B) share of stock.
C) promissory note. D) capital gain.
Answer: D
Diff: 2
Skill: Definition
27) If Tomas purchases a share of stock for $150 and one year later sells it for $225, he will realize a
A) dividend of $75. B) capital gain of $75.
C) dividend of $225. D) a capital gain of $225
Answer: B
Diff: 2
Skill: Analytic
28) If Juanita purchases a share of stock for $20 and three years later sells it for $120, she will
realize a
A) dividend of $100. B) capital gain of $100.
C) dividend of $120. D) capital gain of $140.
Answer: B
Diff: 2
Skill: Analytic
29) Wayne purchased 10 autographed Eli Manning football cards when he was 15 years old for a
total cost of $50 and then sold those football cards 4 years later for $800. Due to these
transactions
A) Wayne earned a capital gain of $800. B) Wayne earned a capital gain of $750.
C) Wayne earned a dividend of $800. D) Wayne earned a dividend of $750.
Answer: B
Diff: 2
Skill: Analytic
30) Mike purchased a 1968 Chevy Corvette in 2006 for $30,000 and a year later he sold it for
$36,000. Due to these transactions
A) Mike earned a capital loss of $6,000. B) Mike earned a dividend of $36,000.
C) Mike earned a dividend of $600. D) Mike earned a capital gain of $6,000.
Answer: D
Diff: 2
Skill: Analytic
129
31) Ami purchased 100 shares of stock for $10,000. A year later the stock is valued at $18,000.
Instead of selling the stock, Ami held onto it for another year. Which of the following is TRUE?
A) The $8,000 increase in the value of the stock represents an unrealized capital gain.
B) The $8,000 increase in the value of the stock represents a dividend.
C) To determine the capital gain, it is first necessary to know the normal rate of return on
capital.
D) none of the above
Answer: A
Diff: 2
Skill: Analytic
32) A dividend is
A) a promissory note issued by corporations when they borrow money.
B) an increase in the value of an asset over the purchase price initially paid for it.
C) the difference between the interest rate a bank pays on deposits and the interest rate it
charges for loans.
D) the portion of a corporationʹs profits that the firm pays out each period to its
shareholders.
Answer: D
Diff: 1
Skill: Definition
33) The portion of a corporationʹs profits that a firm pays out each period to its shareholders is a
A) dividend. B) promissory note.
C) capital gain. D) corporate bond.
Answer: A
Diff: 1
Skill: Definition
2 True/False
1) Fiscal policy generally takes the form of regulations specifying the maximum amount by
which the money supply can be changed.
Answer: FALSE
Diff: 1
Skill: Conceptual
2) Contractionary fiscal policy includes raising taxes.

Answer: TRUE
Diff: 1
Skill: Conceptual
130
3) Monetary policy includes changing the level of household taxes.
Answer: FALSE
Diff: 2
Skill: Conceptual
4) A corporate bond is a promissory note issued by a firm when it borrows money.

Answer: TRUE
Diff: 1
Skill: Definition
5) In the circular flow diagram everyoneʹs expenditure is someone elseʹs receipt.

Answer: TRUE
Diff: 1
Skill: Conceptual
6) A dividend is is paid by shareholders to firms.

Answer: FALSE
Diff: 1
Skill: Definition
7) A transfer payment is the tax one pays when transferring real estate.
Answer: FALSE
Diff: 1
Skill: Definition
8) A capital gain is the increase in value of an asset above its initial cost.
Answer: TRUE
Diff: 1
Skill: Definition
5.3 A Brief History of Macroeconomics

1 Multiple Choice
1) To get the economy out of a slump, Keynes believed that the government should
A) cut both taxes and government spending.
B) increase both taxes and government spending.
C) increase taxes and/or decrease government spending.
D) decrease taxes and/or increase government spending.
Answer: D
Diff: 2
Topic: A Brief History of Macroeconomics
Skill: Fact
131
2) To bring the economy out of an inflationary period, Keynes argued that the government
should
A) cut both taxes and government spending.
B) increase both taxes and government spending.
C) increase taxes and/or decrease government spending.
D) decrease taxes and/or increase government spending.
Answer: C
Diff: 2
Skill: Conceptual
3) Which of the following is an assumption used by Classical economists?

A) Wages adjust downward but not upward.
B) Wages adjust upward but not downward.
C) Wages are inflexible.
D) Wages adjust both upward and downward.
Answer: D
Diff: 1
Skill: Fact
4) According to the Classical model, unemployment

A) could not persist because wages would rise to eliminate the excess supply of labor.
B) could not persist because wages would fall to eliminate the excess supply of labor.
C) could be eliminated through fiscal and monetary policies.
D) could be eliminated only through government intervention.
Answer: B
Diff: 2
Skill: Fact
5) According to Classical economists, if the quantity of labor demanded exceeds the quantity
supplied, there is a
A) surplus of labor and wages will rise. B) shortage of labor and wages will fall.
C) shortage of labor and wages will rise. D) surplus of labor and wages will fall.
Answer: C
Diff: 2
Skill: Fact
6) According to the Classical economists, the economy

A) requires fine-tuning to reach full employment.
B) has sticky prices in many industries.
C) is self-correcting.
D) will never be at full employment.
Answer: C
Diff: 2
Skill: Fact
132
7) Macroeconomic policies became more influenced by Keynesʹ theories starting with,
A) the period of high unemployment and high inflation in the 1970s.
B) the Great Depression.
C) the period of high inflation in the early 1980s.
D) the OPEC recession.
Answer: B
Diff: 1
Skill: Fact
8) According to Classical models, the level of employment is determined primarily by

A) the level of aggregate demand for goods and services.
B) prices and wages.
C) government taxation.
D) government spending.
Answer: B
Diff: 2
Skill: Fact
9) According to Keynes, the level of employment is determined by

A) flexible wages and prices.
B) interest rates.
C) price and wages.
D) the level of aggregate demand for goods and services.
Answer: D
Diff: 2
Skill: Fact
10) The concept of ʺmarket clearingʺ is adopted and defended by

A) Keynesian economists. B) Classical economists.
C) fine-tuning economists. D) demand-side economists.
Answer: B
Diff: 1
Skill: Fact
11) Suppose the economy suffers a high rate of unemployment. According to Keynesian
economists, the government should increase employment by
A) decreasing money supply. B) balancing the budget.
C) not doing anything. D) increasing government spending.
Answer: D
Diff: 1
Skill: Conceptual
133
12) Which of the following would be an example of fine tuning?
A) Firms increase wages to attract high-quality workers.
B) Firms increase employment benefits to increase workersʹ productivity.
C) The federal government enacts legislation to increase spending to try to stimulate the
economy.
D) The federal government passes legislation that would require that the governmentʹs
budget always be balanced.
Answer: C
Diff: 2
Skill: Conceptual
13) Rapid increases in the price level during periods of recession or high unemployment are
known as
A) stagflation. B) stagnation. C) depression. D) inflation.
Answer: A
Diff: 1
Skill: Definition
14) Stagflation occurs when the economyʹs inflation rate is high and
A) employment is high.
B) the unemployment rate is high.
C) the unemployment rate is low.
D) the rate of change in economic activities is positive.
Answer: B
Diff: 1
Skill: Definition
15) Related to the Economics in Practice on p. 97 [409]: F. Scott Fitzgeraldʹs The Great Gatsby is set in
the ʺRoaring ʹ20sʺ. This decade in U.S. history was characterized by
A) economic expansion and high unemployment.
B) recession and high unemployment.
C) economic expansion and low unemployment.
D) the Great Depression and stagflation.
Answer: C
Diff: 2
Topic: A Brief History of Macroeconomics: Economics in Practice
Skill: Fact
16) Related to the Economics in Practice on p. 97 [409]: John Steinbeckʹs The Grapes of Wrath is set in
the early 1930s. During this time, the U.S. economy was primarily in the ________ phase of the
business cycle, culminating in the Great Depression.
A) peak B) recession C) trough D) expansion
Answer: B
Diff: 2
Skill: Fact
134
17) Related to the Economics in Practice on p. 99 [411]: John Maynard Keynesʹ most notable
published work is entitled
A) Capitalism Doomed.
B) The General Theory of Employment, Interest, and Money.
C) The Communist Manifesto.
D) Freakonomics.
Answer: B
Diff: 2
Skill: Fact
18) Related to the Economics in Practice on p. 99 [411]: John Maynard Keynes sought to solve the
economic paradox of the Great Depression, which was the coexistence of
A) low production and low unemployment.
B) high production and low inflation.
C) high production and high inflation.
D) low production and high unemployment.
Answer: D
Diff: 2
Skill: Fact
2 True/False
1) Keynes believed that expansionary fiscal policy could help get an economy out of an inflation.
Answer: FALSE
Diff: 1
Skill: Fact
2) According to the Classical model, an excess supply of labor would drive up wages to a new
equilibrium level and therefore unemployment would not persist.
Answer: FALSE
Diff: 2
Skill: Fact
3) According to Keynes, aggregate supply determines the level of economic activities in the
economy.
Answer: FALSE
Diff: 1
Skill: Fact
4) According to Keynes, the governmentʹs role during periods when private demand is low is to
stimulate aggregate demand and, by so doing, lift the economy out of recession.
Answer: TRUE
Diff: 1
Skill: Fact
135
5) In the Classical model, the level of employment is determined by the level of aggregate
demand.
Answer: FALSE
Diff: 1
Skill: Fact
6) ʺFine tuningʺ is any government attempt to regulate inflation or unemployment.

Answer: TRUE
Diff: 1
Skill: Definition
7) Classical economists believed that economic slowdowns are self-correcting.

Answer: TRUE
Diff: 1
Skill: Fact
5.4 The U.S. Economy Since 1970

1 Multiple Choice
1) Since 1970, the U.S. economy has experienced four

A) periods of high inflation. B) recessions.
C) deflations. D) periods of stagflation.
Answer: B
Diff: 1
Topic: The U.S. Economy Since 1970
Skill: Fact
2) Since 1970, the U.S. economy has experienced two

A) periods of high inflation. B) recessions.
C) deflations. D) all of the above
Answer: A
Diff: 1
Skill: Fact
3) During the U.S. recession of 1980-1982, the unemployment rate reached a high of ________
percent.
A) 7.6 B) 8.8 C) 10.7 D) 22.4
Answer: C
Diff: 1
Skill: Fact
136
4) In the U.S. economy, the inflation rate in 1975 peaked at ________ percent.
A) 10.1 B) 11.0 C) 14.2 D) 22.4
Answer: B
Diff: 1
Skill: Fact
Refer to the information for this hypothetical economy provided in Table 5.1 below to answer the questions
that follow.
Table 5.1
2006 2007 2008
Quarter I II III IV I II III IV I II III IV
Output 90 94 98 102 96 91 88 84 87 94 90 87
5) Refer to Table 5.1. In this economy, a trough existed around the

A) fourth quarter of the year 2007 B) fourth quarter of the year 2006.
C) second quarter of the year 2007. D) third quarter of the year 2008.
Answer: A
Diff: 2
Skill: Analytic
6) Refer to Table 5.1. In this economy, a peak existed around the

A) third quarter of the year 2008. B) third quarter of the year 2006.
C) fourth quarter of the year 2007. D) fourth quarter of the year 2006.
Answer: D
Diff: 2
Skill: Analytic
7) Refer to Table 5.1. The period from after the fourth quarter of 2006 until before the first quarter
of 2008 can be categorized as a period of
A) high inflation. B) low unemployment.
C) high production. D) high unemployment.
Answer: D
Diff: 2
Skill: Analytic
8) Refer to Table 5.1. Which of the following quarters can be associated with inflation?
A) the second quarter of the year 2006 B) the first quarter of the year 2008
C) the second quarter of the year 2008 D) all of the above
Answer: D
Diff: 2
Skill: Analytic
137
2 True/False
1) Since 1970, the U.S. economy has experienced 2 recessions.

Answer: FALSE
Diff: 1
Skill: Fact
2) Since 1970, the U.S. economy has experienced 2 periods of high inflation.
Answer: TRUE
Diff: 1
Skill: Fact
3) Since 1970, the annual inflation rate in the U.S. has been about 9.7 percent or more.
Answer: FALSE
Diff: 1
Skill: Fact
138
Chapter 6 Measuring National Output
and National Income
6.1 Gross Domestic Product

1 Multiple Choice
1) The total market value of all final goods and services produced within a given period by
factors of production located within a country is
A) gross domestic product. B) gross national product.
C) net national product. D) net national income.
Answer: A
Diff: 1
Topic: Gross Domestic Product
Skill: Definition
2) Gross domestic product measures

A) the total spending of everyone in the economy.
B) the value of all output in the economy.
C) the total income of everyone in the economy.
D) all of the above
Answer: D
Diff: 2
Skill: Definition
3) Which of the following is an example of a final good or service?

A) wheat a bakery purchases to make bread
B) coffee beans Starbucks purchases to make coffee
C) lumber purchased by a construction company to used in building houses
D) a computer purchased by Federal Express to track shipments
Answer: D
Diff: 2
Skill: Conceptual
4) Which of the following is a good or service counted in GDP?

A) tires Ford buys to put on a car
B) a used tire you buy for your personal car
C) a new tire you buy for your personal car
D) used tires bought by a used car dealer to put on a car on his lot
Answer: C
Diff: 2
Skill: Conceptual
139
5) Which of the following is an example of an intermediate good?
A) the dough you buy to fix yourself a pizza for dinner
B) the chocolate you buy to make yourself some cookies
C) the pizza sauce you purchase to make pizzas to sell for a fund -raiser for an organization
you belong to
D) lumber you buy to build a house for your dog
Answer: C
Diff: 2
Skill: Conceptual
6) Double counting can be avoided by

A) including the value of intermediate goods in the current year.
B) not counting the value of intermediate goods in GDP.
C) including the value of intermediate goods in the GNP but not in the GDP.
D) including the value of intermediate goods in the production year but not in the selling
year of those goods.
Answer: B
Diff: 2
Skill: Conceptual
7) Which of the following would NOT be counted in 2007ʹs GDP?

A) the value of a 2005 boat you purchase from a boat dealer in 2007
B) the 2007 salary of a used motorcycle salesperson
C) the commissions earned by a real estate agent in selling condominiums built prior to
2007
D) the value of a refrigerator manufactured in 2007 but not sold in 2007
Answer: A
Diff: 2
Skill: Conceptual
8) Which of the following would be counted in 2003ʹs GDP?

A) the value of a loan you take in 2003
B) the value of a TV that was produced in 2002 but not sold until 2003
C) the bonus check a stockbroker gets from his/her company in 2003
D) the value of a bond sold by the federal government
Answer: C
Diff: 2
Skill: Conceptual
140
9) Which of the following is NOT included in 2008ʹs GDP?
A) the value of a motorcycle produced in the United States and exported to Japan
B) the profit earned in 2008 from selling a stock that you purchased in 2005
C) the value of a motor that is used in the production of a lawn mower
D) the commission earned by a headhunter when she locates a job for a client
Answer: B
Diff: 2
Skill: Conceptual
10) Gross national product is the total market value of

A) all final and intermediate goods and service produced by resources owned by a country
in a given year.
B) all final and intermediate goods and services produced in a country, regardless of who
owns the resources.
C) all final goods and services produced in a country in a given year, regardless of who
owns the resources.
D) all final goods and services produced by resources owned by a country, regardless of
where production takes place.
Answer: D
Diff: 1
Skill: Definition
11) If no foreign companies produce in a country, but many of the countryʹs companies produce
abroad, then
A) the countryʹs GNP will tend to exceed its GDP.
B) the countryʹs GDP will tend to exceed its GNP.
C) the countryʹs GNP and GDP will tend to be equal.
D) the countryʹs GDP will tend to be equal to its domestic income.
Answer: A
Diff: 2
Skill: Conceptual
12) Which of the following is included in both the U.S. GDP and GNP?
A) The value of all cars produced by Ford in Mexico.
B) The value of all cars produced by General Motors in the U.S.
C) The value of all cars produced by Toyota in the U.S.
D) The value of cars produced by Nissan in Japan and the U.S.
Answer: B
Diff: 2
Skill: Conceptual
141
13) Which of the following is NOT counted in the GNP of the United States?
A) The wage of a U.S. citizen who works in a foreign country for a foreign firm.
B) The interest earned by a U.S. bank on loans to a business firm located in Brazil.
C) The profit earned by a restaurant located in the United States but owned by a Mexican
company.
D) The value of services that are produced by state and local governments in the United
States.
Answer: C
Diff: 2
Skill: Conceptual
14) The value of what KFC produces in Japan is included in the U.S. ________ and in the Japanese
________.
A) GDP; GDP B) GNP; GNP C) GNP; GDP D) GDP; GNP
Answer: C
Diff: 2
Skill: Conceptual
15) Profits earned in the United States by foreign-owned companies are included in
A) the U.S. GDP but not GNP. B) neither the U.S. GDP nor GNP.
C) the U.S. GNP but not GDP. D) both the U.S. GDP and GNP.
Answer: A
Diff: 1
Skill: Conceptual
16) The GDP of the U.S. in 2002 was around $10 trillion. This means
A) that the value of output in the U.S. in 2002 was around $10 trillion.
B) that total income in the U.S. in 2002 was around $10 trillion.
C) that total spending on final goods and services in the U.S. in 2002 was around $10
trillion.
D) all of the above
Answer: D
Diff: 2
Skill: Conceptual
142
17) The GDP includes
A) the value of all intermediate goods and services.
B) the value of all final goods and services.
C) the value of both intermediate and final goods and services.
D) the value of all transactions.
Answer: B
Diff: 2
Skill: Conceptual
18) Income Mexican citizens earn in the U.S. counts in

A) U.S. GNP. B) Mexican GNP.
C) Mexican GDP. D) both U.S. and Mexican GDP.
Answer: B
Diff: 2
Skill: Conceptual
2 True/False
1) GDP measures the total income of everyone and the total spending by everyone in the
economy.
Answer: FALSE
Diff: 1
Skill: Conceptual
2) Total income in the economy can sometimes be greater than total spending.
Answer: FALSE
Diff: 2
Skill: Conceptual
3) The income of U.S. citizens working abroad counts in U.S. GDP.

Answer: FALSE
Diff: 2
Skill: Conceptual
4) Stock market transactions are part of GNP.

Answer: FALSE
Diff: 2
Skill: Conceptual
143
5) Value added is the difference between the value of good as they leave a stage of production
and cost of the goods as they entered that stage of production.
Answer: TRUE
Diff: 2
Skill: Definition
6.2 Calculating GDP

1 Multiple Choice
1) The equation for GDP using the expenditure approach is

A) GDP = C + I + G + EX - IM. B) GDP = C + I + G + (IM - EX).
C) GDP = C + I + G + EX + IM. D) GDP = C + I + G - EX - IM.
Answer: A
Diff: 1
Topic: Calculating GDP
Skill: Definition
2) The single largest expenditure component in GDP is

A) government spending. B) investment.
C) consumption. D) net exports.
Answer: C
Diff: 1
Skill: Fact
Refer to the information provided in Table 6.1 below to answer the questions that follow.
Table 6.1
$Billions
Durable goods 800
Nonresidential investment 400
Federal purchases of goods 300
Exports 400
State and local purchases of goods 200
Residential investment 50
Services 500
Imports 250
Change in business inventories -25
Nondurable goods 700
3) Refer to Table 6.1. Personal consumption expenditures in billions of dollars are

A) 1,000. B) 1,300. C) 1,500. D) 2,000.
Answer: D
Diff: 2
Skill: Analytic
144
4) Refer to Table 6.1. The value for gross private domestic investment in billions of dollars is
A) 300. B) 375. C) 425. D) 450.
Answer: C
Diff: 2
Skill: Analytic
5) Refer to Table 6.1. The value for net exports in billions of dollars is
A) 150. B) 250. C) 650. D) 800.
Answer: A
Diff: 1
Skill: Analytic
6) Refer to Table 6.1. The value of gross domestic product in billions of dollars is
A) 3,000. B) 3,075. C) 3,125. D) 3,750.
Answer: B
Diff: 2
Skill: Analytic
7) Refer to Table 6.1. The value of government spending in billions of dollars is

A) 100. B) 200. C) 300. D) 500.
Answer: D
Diff: 2
Skill: Analytic
145
Table 6.2
$Billions
Federal purchases of goods 800
Services 500
Imports 200
Change in business inventories 40
Durable goods 300
Nondurable goods 600
Exports 50
Residential investment 200
State and local purchases 200
Nonresidential investment 650
8) Refer to Table 6.2. Personal consumption expenditures in billions of dollars are

A) 900. B) 1,100. C) 1,400. D) 1,600.
Answer: C
Diff: 2
Skill: Analytic
9) Refer to Table 6.2. The value for gross private domestic investment in billions of dollars is
A) 740. B) 810. C) 850. D) 890.
Answer: D
Diff: 2
Skill: Analytic
10) Refer to Table 6.2. The value for net exports in billions of dollars is
A) -200. B) -150. C) 50. D) 250.
Answer: B
Diff: 1
Skill: Analytic
11) Refer to Table 6.2. The value for gross domestic product in billions of dollars is
A) 2,900. B) 3,140. C) 3,440. D) 3,650.
Answer: B
Diff: 2
Skill: Analytic
146
12) Refer to Table 6.2. The value of government spending in billions of dollars is
A) 200. B) 600. C) 800. D) 1,000.
Answer: D
Diff: 2
Skill: Analytic
13) A company produced 8 dishwasher machines in 2005. The company sold 6 in 2005 and added
2 to its inventories. The market value of the dishwasher machines in 2005 was $200 per unit.
What is the value of this companyʹs output that will be included in the 2005 GDP?
A) $400. B) $1,400. C) $1,600. D) $2,000.
Answer: C
Diff: 2
Skill: Analytic
14) A farmer buys a new tractor from John Deere to use on her cotton farm. This tractor is
included in GDP as
A) part of gross private domestic investment.
B) a durable consumption good.
C) a service.
D) a nondurable consumption good.
Answer: A
Diff: 2
Skill: Conceptual
15) The change in business inventories is measured as

A) final sales minus GDP. B) final sales plus GDP.
C) GDP minus final sales. D) the ratio of final sales to GDP.
Answer: C
Diff: 2
Skill: Conceptual
16) In 2007 final sales equal $200 billion, and the change in business inventories is $50 billion. GDP
in 2007
A) is $250 billion. B) is $200 billion. C) is $150 billion. D) is $40 billion.
Answer: A
Diff: 2
Skill: Analytic
147
17) In 2006 final sales equal $350 billion and the change in business inventories is -$60 billion.
GDP in 2006
A) is $290 billion.
B) is $295 billion.
C) is $410 billion.
D) cannot be determined from this information.
Answer: A
Diff: 2
Skill: Analytic
18) In 2008 the change in business inventories is -$70 billion and GDP is $200 billion. Final sales in
2008
A) are $130 billion. B) are $200 billion.
C) are $270 billion. D) are $340 billion.
Answer: C
Diff: 2
Skill: Analytic
19) In 2007, GDP was exactly equal to final sales. This implies that
A) there was accumulation of inventories that year.
B) there was a decline in inventories that year.
C) there was no change in inventories that year.
D) GDP did not grow that year compared to the year before.
Answer: C
Diff: 2
Skill: Analytic
20) If the change in business inventories is zero, then final sales are
A) zero. B) less than GDP.
C) greater than GDP. D) equal to GDP.
Answer: D
Diff: 2
Skill: Analytic
21) If in a year there is a positive inventory investment, then final sales

A) exceed GDP. B) are less than GDP.
C) equal GDP. D) are zero.
Answer: B
Diff: 1
Skill: Analytic
148
22) Net investment equals
A) GDP minus final sales. B) gross investment minus final sales.
C) gross investment minus depreciation. D) depreciation plus GDP.
Answer: C
Diff: 1
Skill: Definition
23) If net investment is zero, then

A) gross investment is greater than depreciation.
B) gross investment is less than depreciation.
C) gross investment equals depreciation.
D) depreciation is zero.
Answer: C
Diff: 1
Skill: Analytic
24) Suppose that net investment in 2008 was $20 billion and depreciation was $4 billion. Gross
investment in 2008 was
A) $16 billion. B) $20 billion. C) $24 billion. D) $28 billion.
Answer: C
Diff: 1
Skill: Analytic
25) The total value of all capital goods newly produced in a given period is
A) the change in business inventories. B) depreciation.
C) net investment. D) gross investment.
Answer: D
Diff: 1
Skill: Definition
26) The change in capital stock in a period is equal to

A) the ratio of the amount of the capital at the beginning of the period to the amount of
depreciation.
B) the amount of the capital stock at the beginning of the period plus gross investment
minus depreciation.
C) the amount of the capital at the beginning of the period plus gross investment.
D) the amount of the capital at the beginning of the period minus net investment.
Answer: B
Diff: 2
Skill: Definition
149
27) Net investment is
A) gross investment minus depreciation. B) gross investment plus depreciation.
C) depreciation minus gross investment. D) GNP minus final sales.
Answer: A
Diff: 1
Skill: Definition
28) Depreciation is
A) the decrease in the overall price level.
B) the additional capital stock in a year.
C) the amount of used up machinery in a year.
D) the amount of decline in business inventories.
Answer: C
Diff: 1
Skill: Definition
29) If net investment in 2007 is $350 billion and gross investment in 2007 is $500 billion,
depreciation in 2007 is
A) $0.7 billion. B) $150 billion. C) $175 billion. D) $250 billion.
Answer: B
Diff: 1
Skill: Analytic
30) If net investment in 2008 is $500 billion and gross investment in 2008 is $900 billion,
depreciation in 2008 is
A) -$500 billion. B) $0. C) $400 billion. D) $1,400 billion.
Answer: C
Diff: 1
Skill: Analytic
31) If gross investment in 2008 is $750 billion and depreciation in 2008 is $850 billion, net
investment in 2008 is
A) -$50 billion. B) -$100 billion.
C) -$800 billion. D) -$1,600 billion.
Answer: B
Diff: 1
Skill: Analytic
150
32) If gross investment in 2008 is $200 billion and depreciation in 2008 is $1,000 billion, net
investment in 2008 is
A) -$900 billion. B) -$800 billion. C) $1,000 billion. D) $1,200 billion.
Answer: B
Diff: 1
Skill: Analytic
33) Exports equal

A) imports - net exports. B) net exports + imports.
C) net exports - imports. D) imports + (exports + imports).
Answer: B
Diff: 1
Skill: Definition
34) When calculating GDP, exports are ________ and imports are ________.
A) added; added B) added; subtracted
C) subtracted; added D) subtracted; subtracted
Answer: B
Diff: 1
Skill: Conceptual
35) If the value of net exports is negative, then

A) exports exceed imports. B) imports exceed exports.
C) exports equal imports. D) imports are zero.
Answer: B
Diff: 1
Skill: Conceptual
36) The largest income component of GDP is

A) proprietorsʹ income. B) rental income.
C) compensation of employees. D) corporate profit.
Answer: C
Diff: 2
Skill: Fact
151
37) What should be subtracted from GDP to calculate national income?
A) depreciation
B) indirect taxes
C) personal income taxes.
D) net factor payments to the rest of the world
Answer: A
Diff: 2
Skill: Conceptual
38) Proprietorsʹ income is

A) the income of unincorporated businesses.
B) the income of all businessesincorporated and unincorporated.
C) the income of sole proprietorships.
D) the income of partnerships.
Answer: A
Diff: 2
Skill: Definition
39) Net interest is the interest on loans paid by

A) businesses, households, and the government.
B) businesses and households.
C) businesses and the government.
D) businesses.
Answer: D
Diff: 3
Skill: Definition
40) Interest paid by households and by the government is

A) counted in national income, but not in GDP.
B) not counted in GDP because it is not assumed to flow from the production of goods and
services.
C) not counted in GDP but is counted in GNP because it is paid by U.S. citizens to people
living in the United States.
D) included in both GDP and GNP because it represents an expenditure by one group and a
receipt of income by another group.
Answer: B
Diff: 3
Skill: Conceptual
41) What type of tax affects the amount of money you pay for a product?
A) direct tax B) income tax
C) indirect tax D) all of the above
Answer: C
Diff: 2
Skill: Conceptual
152
42) Depreciation is
A) subtracted from national income to get GDP.
B) added to national income to get GDP.
C) subtracted from GNP to get NNP.
D) added to GNP to get NNP.
Answer: C
Diff: 2
Skill: Conceptual
Table 6.3
$Billions
Compensation of employees 475
Proprietorsʹ income 60
Corporate profit 40
Net interest 25
Rental income 10
Deprecation 70
Indirect taxes 40
Direct taxes 80
Subsidies 15
Payments of factor income to the rest of the world 20
Receipts of factor income from the rest of the world 15
43) Refer to Table 6.3. The value for national income in billions of dollars is
A) 585. B) 600. C) 635. D) 850.
Answer: C
Diff: 2
Skill: Analytic
44) Refer to Table 6.3. The value for gross domestic product in billions of dollars is
A) 485. B) 680. C) 685. D) 710.
Answer: D
Diff: 2
Skill: Analytic
45) Refer to Table 6.3. The value of net factor payments to the rest of the world is
A) 5. B) 15. C) 25. D) 35.
Answer: A
Diff: 2
Skill: Analytic
153
46) Refer to Table 6.3. The value of disposable income
A) is 505.
B) is 560.
C) is 605.
D) cannot be calculated given the information in Table 6.3.
Answer: D
Diff: 2
Skill: Analytic
47) If receipts of factor income from the rest of the world exceed payments of factor income to the
rest of the world, then
A) GDP is greater than GNP. B) GDP equals GNP.
C) GNP equals NNP. D) GNP is greater than GDP.
Answer: D
Diff: 2
Skill: Analytic
Table 6.4
$Billions
Depreciation 40
Receipts of factor income from the rest of the world 30
Government purchases 100
Imports 50
Payments of factor income to the rest of the world 50
Net private domestic investment 200
Personal income taxes 120
Personal consumption expenditures 600
Dividends 20
Exports 60
Amount of national income not going to households 20
48) Refer to Table 6.4. The value for GDP in billions of dollars is
A) 910. B) 920. C) 950. D) 1,050.
Answer: C
Diff: 2
Skill: Analytic
49) Refer to Table 6.4. The value for GNP in billions of dollars is
A) 900. B) 930. C) 980. D) 1,010.
Answer: B
Diff: 2
Skill: Analytic
154
50) Refer to Table 6.4. The value for NNP in billions of dollars is
A) 890. B) 910. C) 940. D) 970.
Answer: A
Diff: 2
Skill: Analytic
51) Refer to Table 6.4. The value for national income in billions of dollars is
A) 890. B) 910. C) 940. D) 970.
Answer: A
Diff: 2
Skill: Analytic
52) Refer to Table 6.4. The value for personal income in billions of dollars is
A) 870. B) 890. C) 950. D) 960.
Answer: A
Diff: 2
Skill: Analytic
53) Refer to Table 6.4. The value for disposable personal income in billions of dollars is
A) 750. B) 770. C) 820. D) 990.
Answer: A
Diff: 2
Skill: Analytic
54) If GNP is $600 billion, receipts of factor income from the rest of the world are $50 billion, and
payments of factor income to the rest of the world are $30 billion, then GDP is
Answer: B
Diff: 3
Skill: Analytic
55) If GNP is $200 billion, receipts of factor income from the rest of the world are $10 billion, and
payments of factor income to the rest of the world are $30 billion, then GDP is
Answer: C
Diff: 3
Skill: Analytic
155
56) If GDP is $500 billion and depreciation is $40 billion, then net national product
A) is $460 billion.
B) is $500 billion.
C) is $540 billion.
Answer: D
Diff: 2
Skill: Analytic
57) If GDP is $300 billion, depreciation is $30 billion, and net factor income from the rest of the
world is -$40 billion, then net national product is
Answer: D
Diff: 3
Skill: Analytic
58) If GNP is $800 billion and depreciation is $90 billion, then net national product is
Answer: A
Diff: 1
Skill: Analytic
59) If GNP is $200 billion and depreciation is $20 billion, then net national product is
Answer: B
Diff: 1
Skill: Analytic
60) If depreciation equals zero and retained earnings equal $5 billion, then
A) GNP is less than net national product by $5 billion.
B) GNP equals net national product.
C) Net national product is less than GNP by $5 billion.
D) GNP is greater than GDP by $5 billion.
Answer: B
Diff: 1
Skill: Analytic
156
61) Net national product is
A) GDP plus depreciation. B) GDP minus depreciation.
C) GNP minus depreciation. D) GNP plus depreciation.
Answer: C
Diff: 1
Skill: Definition
62) The total income of households is

A) net national product. B) personal income.
C) national income. D) production income.
Answer: B
Diff: 1
Skill: Definition
63) Personal income is national income minus

A) depreciation.
B) net factor income to the rest of the world.
C) the amount of national income not going to households.
D) imports.
Answer: C
Diff: 2
Skill: Fact
64) If national income is $600 billion, personal income is $400 billion, personal taxes are $120
billion, then disposable income equals
Answer: C
Diff: 2
Skill: Analytic
65) Which of the following is subtracted from national income to get to personal income?
A) retained earnings B) personal interest income
C) depreciation D) personal Taxes
Answer: A
Diff: 2
Skill: Conceptual
157
66) Personal income
A) is always less than national income.
B) is always greater than national income.
C) may be greater than or less than national income.
D) will always equal national income.
Answer: C
Diff: 2
Skill: Conceptual
67) If personal income is $925 billion and personal income taxes are $70 billion, the value of
disposable personal income is
Answer: B
Diff: 1
Skill: Analytic
68) If personal saving is -$10 billion and disposable personal income is $370 billion, then personal
consumption spending
A) is $360 billion.
B) is $380 billion.
C) is $390 billion.
Answer: B
Diff: 2
Skill: Analytic
69) The personal saving rate is

A) the difference between total personal spending and personal saving.
B) the difference between personal income and disposable personal income.
C) the ratio of personal income to personal saving.
D) the percentage of disposable personal income that is saved.
Answer: D
Diff: 2
Skill: Definition
70) If disposable personal income is $400 billion and personal saving is $8 billion, the personal
saving rate is
A) 1.5%. B) 2%. C) 5%. D) 12%.
Answer: B
Diff: 1
Skill: Analytic
158
71) If the personal saving rate is 5% and personal saving is $10 billion, the value of personal
disposable income
A) is $100 billion.
B) is $200 billion.
C) is $500 billion.
Answer: B
Diff: 1
Skill: Analytic
72) Saving rates tend to ________ during boom times and ________ during recession periods.
A) rise; rise B) rise; fall C) fall; rise D) fall; fall
Answer: C
Diff: 2
Skill: Conceptual
73) Related to the Economics in Practice on p. 109 [421]: The value of the used goods sold on eBay
from a U.S. seller to a U.S. buyer is
A) counted in U.S. GDP but not GNP.
B) counted in U.S. GNP but not GDP.
C) counted in both U.S. GDP and GNP.
D) not counted in either U.S. GDP or GNP.
Answer: D
Diff: 2
Topic: Calculating GDP: Economics in Practice
Skill: Conceptual
74) Related to the Economics in Practice on p. 109 [421]: If a Swiss dealer sells a newly produced
Swiss watch on eBay to a U.S. customer, the value of the watch is
A) counted in U.S. GDP.
B) counted in U.S. GDP and Swiss GDP.
C) counted in Swiss GDP.
D) not counted in either U.S. or Swiss GDP.
Answer: C
Diff: 2
Skill: Conceptual
159
75) Related to the Economics in Practice on p. 113 [425]: The National Income and Product Accounts
(NIPAs) allow policymakers and economists to analyze the impact of
A) spending and tax plans. B) price shocks.
C) monetary policy. D) all of the above
Answer: D
Diff: 1
Skill: Conceptual
76) Related to the Economics in Practice on p. 113 [425]: ________ is responsible for producing and
maintaining the National Income and Product Accounts (NIPAs).
A) The Department of the Treasury B) The Federal Reserve Bank
C) Congress D) The Department of Commerce
Answer: D
Diff: 1
Skill: Fact
2 True/False
1) Transfer payments are subtracted from national income to get to personal income.
Answer: FALSE
Diff: 1
Skill: Conceptual
2) If investment is larger than depreciation, the capital stock decreases.

Answer: FALSE
Diff: 1
Skill: Analytic
3) Depreciation is included in GDP, but excluded from NNP.

Answer: TRUE
Diff: 2
Skill: Conceptual
4) Final sales plus changes in inventories equals GDP.

Answer: TRUE
Diff: 2
Skill: Conceptual
160
5) New houses count as consumer durables.
Answer: FALSE
Diff: 2
Skill: Conceptual
6) Dairy Queen opens a branch in Estonia. The sales of the restaurant enter the U.S. GDP and the
Estonian GNP.
Answer: FALSE
Diff: 2
Skill: Conceptual
7) Consumers can spend their entire personal income.

Answer: FALSE
Diff: 2
Skill: Conceptual
8) The difference between GNP and GDP is depreciation.

Answer: FALSE
Diff: 2
Skill: Conceptual
9) Disposable personal income is personal income minus personal taxes.

Answer: TRUE
Diff: 2
Skill: Definition
6.3 Nominal versus Real GDP

1 Multiple Choice
1) Nominal GDP measures the value of all goods and services

A) in constant dollars. B) in current dollars.
C) in fixed dollars. D) without inflation.
Answer: B
Diff: 1
Topic: Nominal versus Real GDP
Skill: Definition
2) Gross domestic product measured in terms of the prices of a fixed, or base, year is
A) current GDP. B) base GDP. C) real GDP. D) nominal GDP.
Answer: C
Diff: 1
Skill: Definition
161
3) Nominal GDP is gross domestic product measured
A) in the prices of a base year.
B) in current dollars.
C) at a constant output level but at the base-year prices.
D) as the difference between the current yearʹs GDP and last yearʹs GDP.
Answer: B
Diff: 1
Skill: Definition
4) Real GDP is gross domestic product measured

A) at a constant output level but at current prices.
B) in current dollars.
C) in the prices of a base year.
D) as the difference between the current yearʹs GDP and last yearʹs GDP.
Answer: C
Diff: 1
Skill: Definition
5) If real GDP in 2007 using 2006 prices is lower than nominal GDP of 2007, then
A) prices in 2007 are lower than prices in 2006.
B) nominal GDP in 2007 equals nominal GDP in 2006.
C) prices in 2007 are higher than prices in 2006.
D) real GDP in 2007 is larger than real GDP in 2006.
Answer: C
Diff: 3
Skill: Analytic
6) If real GDP in 2008 using 2007 prices is higher than nominal GDP of 2008, then
A) prices in 2008 are lower than prices in the base year.
B) nominal GDP in 2008 equals nominal GDP in 2007.
C) prices in 2008 are higher than prices in the base year.
D) real GDP in 2008 is larger than real GDP in 2007.
Answer: A
Diff: 3
Skill: Analytic
162
Table 6.5
Production Prices
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Good X 60 80 100 $1.00 $1.00 $1.40
Good Y 100 110 130 $0.80 $0.90 $1.00
7) Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y.
The value for this economyʹs nominal GDP in year 1
A) is $140. B) is $160. C) is $180. D) is $200.
Answer: A
Diff: 1
Skill: Analytic
The value for this economyʹs nominal GDP in year 3 is
A) $204. B) $222. C) $250. D) $270.
Answer: D
Diff: 1
Skill: Analytic
The value for this economyʹs nominal GDP in year 2 is
A) $168. B) $179. C) $202. D) $214.
Answer: B
Diff: 1
Skill: Analytic
10) Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. If
year 1 is the base year, the value for this economyʹs real GDP in year 2 is
A) $168. B) $179. C) $202. D) $214.
Answer: A
Diff: 2
Skill: Analytic
year 1 is the base year, the value for this economyʹs GDP deflator in year 1 is
A) 1. B) 100. C) 110. D) 111.
Answer: B
Diff: 2
Skill: Analytic
163
year 1 is the base year, the value for this economyʹs GDP deflator in year 2 is
A) 93.9. B) 100. C) 106.5. D) 179.
Answer: C
Diff: 2
Skill: Analytic
year 1 is the base year, the value for this economyʹs inflation rate between year 1 and year 2 is
A) -6.1%. B) -5.5%. C) 6.5%. D) 79%.
Answer: C
Diff: 3
Skill: Analytic
14) The GDP deflator is the

A) difference between real GDP and nominal GDP multiplied by 100.
B) difference between nominal GDP and real GDP multiplied by 100.
C) ratio of nominal GDP to real GDP multiplied by 100.
D) ratio of real GDP to nominal GDP multiplied by 100.
Answer: C
Diff: 1
Skill: Definition
15) If nominal GDP is $8 trillion and real GDP is $6 trillion, the GDP deflator is
A) 48. B) 75. C) 133.33. D) 480.
Answer: C
Diff: 1
Skill: Analytic
16) If the GDP deflator is greater than 100, then

A) nominal GDP is greater than real GDP.
B) nominal GDP is lower than real GDP.
C) nominal GDP equals real GDP.
D) prices decreased by more than half between the current and the base years.
Answer: A
Diff: 1
Skill: Analytic
164
17) The GDP deflator in year 2 is 110 and the GDP deflator in year 3 is 118. The rate of inflation
between years 2 and 3 is
A) 4.55%. B) 7.27%. C) 8%. D) 18%.
Answer: B
Diff: 2
Skill: Analytic
18) The GDP deflator in year 2 is 110 using year 1 as a base year. This means that, on average, the
price of goods and services is
A) 110% higher in year 2 than in year 1. B) 10% higher in year 2 than in year 1.
C) 5% higher in year 1 than in year 2. D) 110% higher in year 1 than in year 2.
Answer: B
Diff: 2
Skill: Analytic
19) The GDP deflator in year 2 is 95 using year 1 as a base year. This means that, on average, the
price of goods and services is
A) 105% higher in year 2 than in year 1. B) 5% higher in year 2 than in year 1.
C) 5% higher in year 1 than in year 2. D) 105% higher in year 1 than in year 2.
Answer: C
Diff: 2
Skill: Analytic
2 True/False
1) If in the same period output doubles and the price level remains the same, nominal GDP
doubles.
Answer: TRUE
Diff: 2
Skill: Analytic
2) A GDP deflator is real GDP divided by nominal GDP times 100.

Answer: FALSE
Diff: 2
Skill: Definition
3) If the GDP deflator next year is less than the GDP deflator this year, then the price level has
fallen.
Answer: TRUE
Diff: 2
Skill: Analytic
165
4) GDP measured in base year prices is real GDP.
Answer: TRUE
Diff: 2
Skill: Definition
5) If nominal GDP rises, then so must real GDP.

Answer: FALSE
Diff: 2
Skill: Conceptual
6) If real GDP rises, then so must nominal GDP.

Answer: FALSE
Diff: 2
Skill: Conceptual
7) If real GDP increased during a year, then output must have increased.
Answer: TRUE
Diff: 2
Skill: Conceptual
6.4 Limitations of the GDP Concept

1 Multiple Choice
1) GDP is not a perfect measure of social welfare and the societyʹs economic well-being because
A) it does not say anything about the distribution of income.
B) GDP accounting rules do not adjust for production that causes negative externalities.
C) it does not include all economic activities in the economy.
D) all of the above
Answer: D
Diff: 2
Topic: Limitations of the GDP Concept
Skill: Conceptual
2) Legalizing all forms of illegal activities would

A) reduce measured GDP.
B) reduce the size of the underground economy and increase measured GDP.
C) reduce both the underground economy and measured GDP.
D) increase the size of the underground economy and reduce measured GDP.
Answer: B
Diff: 2
Skill: Conceptual
166
3) Per capita gross national income (GNI) decreases when
A) GNI and the population increase at the same rate.
B) GNI does not change and the population increases.
C) GNI and the population decrease at the same rate.
D) GNI increases and the population does not change.
Answer: B
Diff: 2
Skill: Conceptual
4) Gross national income is

A) GNP converted into dollars using an average exchange rate over several years adjusted
for rates of inflation.
B) GDP converted into dollars using an average exchange rate over several years adjusted
for rates of inflation.
C) GNP measured using an incomes approach.
D) GNP divided by population.
Answer: A
Diff: 2
Skill: Conceptual
5) The base year of an index is

A) the year chosen for the weights in a fixed weight procedure.
B) the year currently being calculated.
C) the last year of the index.
D) the first year of the index.
Answer: A
Diff: 2
Skill: Fact
6) Fixed weight indexes

A) account for responses to supply shifts.
B) account for response to demand shifts.
C) generally become less accurate the farther in time they are from the base year.
D) generally become less accurate the closer in time they are to the base year.
Answer: C
Diff: 2
Skill: Conceptual
167
2 True/False
1) All economic activities in the economy are included in the GDP.

Answer: FALSE
Diff: 1
Skill: Conceptual
2) The costs of pollution are subtracted from the value of final sales before calculating GDP.
Answer: FALSE
Diff: 1
Skill: Conceptual
3) A weakness in the concept of GDP is that it ignores income distribution.

Answer: TRUE
Diff: 1
Skill: Conceptual
4) Production in the illegal or underground economy is not reflected in GDP.

Answer: TRUE
Diff: 1
Skill: Conceptual
5) Fixed weight indexes can not account for new goods.

Answer: TRUE
Diff: 1
Skill: Conceptual
168
Chapter 7 Unemployment, Inflation,
and Long-Run Growth
7.1 Unemployment
1 Multiple Choice
1) We can safely say that total output can increase if there is a(n)
A) increase in the size of the labor force and a decrease in the productivity of workers.
B) decrease in the size of capital and an increase in the productivity of machines.
C) increase in the number of machines per worker.
D) decrease in the number of workers per machine.
Answer: C
Diff: 2
Topic: Unemployment
Skill: Conceptual
2) The productivity of workers is defined as the

A) total output produced by the labor force.
B) output produced by a worker per hour.
C) number of hours a worker spends at work.
D) number of workers needed to produce one dayʹs volume of output.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Definition
3) The capital per worker ratio is a measure of

A) how many tools or machines each worker has to work with.
B) how productive workers are.
C) how much GDP is growing.
D) how much borrowed money is needed per worker.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Definition
4) Productivity is the ratio of

A) total output to the total number of worker hours.
B) total output to the total population.
C) total output to the total number of unemployed.
D) total capital to the total number of workers.
Answer: A
Diff: 1
Topic: Unemployment
Skill: Definition
169
5) For the 1952-2003 period in the United States, output per worker hour
A) increased at a constant rate.
B) decreased during the 1960s.
C) fluctuated around an upward trend.
D) showed the largest increase during the 1980s.
Answer: C
Diff: 1
Topic: Unemployment
Skill: Fact
6) All of the following explain the growth in output per worker hour during the 20th century
EXCEPT
A) the quality of labor improved during that period.
B) the quantity of labor increased during that period.
C) the quality of capital improved during that period.
D) the worker capital ratio decreased during that period.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Conceptual
7) Bob is unemployed if he
A) is temporarily laid off.
B) is not looking for a job.
C) has looked for a job for two months and then quit looking.
D) A and C are correct
Answer: A
Diff: 1
Topic: Unemployment
Skill: Conceptual
8) For you to be considered out of the labor force, you can be

A) a full-time student. B) a full-time retiree.
C) a full-time volunteer. D) any of the above
Answer: D
Diff: 1
Topic: Unemployment
Skill: Conceptual
9) Cheryl graduated from college a month ago and is now without work. She accepted a job that
will start next month. Today, Cheryl is
A) not in the labor force. B) in the labor force.
C) employed. D) a discouraged worker.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Conceptual
170
10) The number of people unemployed equals
A) the number of people employed minus the labor force.
B) the labor force plus the number of people employed.
C) the labor force minus the number of people employed.
D) the number of people employed divided by the labor force.
Answer: C
Diff: 1
Topic: Unemployment
Skill: Definition
11) Jake retired from the police force. He started working an hour or two a day at a paid job in
cityʹs courthouse. Jake is
A) employed. B) in the labor force.
C) unemployed. D) not in the labor force.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Conceptual
12) Diane lost her job and immediately started looking for another job. As a result the
A) unemployment rate increases. B) labor force increases.
C) labor force decreases. D) unemployment rate remains constant.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Conceptual
Table 7.1
Employed 14,000 people
Unemployed 3,000 people
Not in the Labor Force 4,000 people
13) Refer to Table 7.1. The labor force equals

A) 14,000 people. B) 17,000 people. C) 18,000 people. D) 21,000 people.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Analytic
14) Refer to Table 7.1. The unemployment rate is

A) 17.6%. B) 16.7%. C) 14.3%. D) 25.0%.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Analytic
171
15) Refer to Table 7.1. The labor-force participation rate is
A) 75.0%. B) 66.7%. C) 77.8%. D) 80.9%.
Answer: D
Diff: 2
Topic: Unemployment
Skill: Analytic
16) Refer to Table 7.1. The employment rate is

A) 85.7%. B) 83.3%. C) 82.4%. D) 75.0%.
Answer: C
Diff: 2
Topic: Unemployment
Skill: Analytic
Table 7.2
Labor force participation rate 75%
Total population 16 years of age and older 200 million
Unemployment rate 10%
17) Refer to Table 7.2. The labor force

A) equals 150 million.
B) equals 130 million.
C) equals 170 million
Answer: A
Diff: 3
Topic: Unemployment
Skill: Analytic
18) Refer to Table 7.2. The total number of people unemployed is

A) 20 million. B) 13 million. C) 17 million. D) 15 million.
Answer: D
Diff: 3
Topic: Unemployment
Skill: Analytic
19) Refer to Table 7.2. The total number of people employed is

A) 153 million. B) 117 million. C) 135 million. D) 180 million.
Answer: C
Diff: 3
Topic: Unemployment
Skill: Analytic
172
20) The unemployment rate is
A) unemployed/population × 100.
B) (employed - unemployed)/labor force × 100.
C) (labor force - employed)/labor force × 100.
D) (employed - labor force)/employed × 100.
Answer: C
Diff: 3
Topic: Unemployment
Skill: Definition
21) The number of people classified as employed is 260,000 and the number of people classified as
unemployed is 30,000. The size of the labor force
A) equals 290,000. B) equals 230,000.
C) equals 260,000. D) equals 320,000.
Answer: A
Diff: 1
Topic: Unemployment
Skill: Analytic
22) The number of people classified as employed is 350,000 and the number of people in the labor
force is 500,000. The total number of people classified as unemployed is
A) 350,000. B) 150,000. C) 425,000. D) 500,000.
Answer: B
Diff: 1
Topic: Unemployment
Skill: Analytic
23) If the number of people classified as unemployed is 20,000 and the number of people classified
as employed is 400,000, what is the unemployment rate?
A) 2.0% B) 4.8% C) 5.0% D) 9.2%
Answer: B
Diff: 2
Topic: Unemployment
Skill: Analytic
24) If the number of people classified as unemployed is 20,000 and the number of people classified
as employed is 620,000, what is the unemployment rate?
A) 3.1% B) 10.6% C) 1.6% D) 632%
Answer: A
Diff: 2
Topic: Unemployment
Skill: Analytic
173
25) If the number of people employed is 150,000 and the labor force is 170,000, the unemployment
rate is
A) 6.25%. B) 11.76%. C) 2.5%. D) 6.55%.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Analytic
26) If the unemployment rate is 6.2% and the number of people employed is 200,000, the total
number of people unemployed is approximately
A) 12,400 people
B) 10,970 people.
C) 13,220 people.
D) cannot be determined from this information
Answer: C
Diff: 3
Topic: Unemployment
Skill: Analytic
27) If the unemployment rate is 6.2% and the number of people employed is 200,000, the labor
force is approximately
A) 212,400 people.
B) 210,970 people
C) 213,220 people.
D) cannot be determined from this information
Answer: C
Diff: 3
Topic: Unemployment
Skill: Analytic
28) If the labor force is 320,000 and the total population 16 years of age or older is 400,000, the
labor-force participation rate is
A) 72%. B) 76%. C) 80%. D) 88%.
Answer: C
Diff: 2
Topic: Unemployment
Skill: Analytic
29) If the labor-force participation rate is 82% and the total population 16 years of age or older is 1
million people, the labor force is
A) 910,000 people. B) 820,000 people.
C) 740,000 people. D) 180,000 people.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Analytic
174
30) If the number of unemployed equals 30,000, the number of employed equals 60,000, and the
number not in the labor force is 10,000, the labor-force participation rate
A) is 90%.
B) is 67%.
C) is 88.9%.
Answer: A
Diff: 3
Topic: Unemployment
Skill: Analytic
31) If the number of unemployed equals 240,000 and the number of employed equals 300,000, the
labor-force participation rate
A) is 80%.
B) is 24%.
C) is 55.6%.
Answer: D
Diff: 2
Topic: Unemployment
Skill: Analytic
32) In the U.S. the highest unemployment rate is for ________ and the lowest is for ________.
A) African-American teenagers; white males
B) men over 55; women below 25
C) African-American teenagers; white females
D) African-American women over 25; white males
Answer: A
Diff: 1
Topic: Unemployment
Skill: Fact
33) When an individual quits his/her job and decides to stay at home for a while, the labor -force
participation rate
A) decreases.
B) increases.
C) stays the same.
D) may increase or decrease, depending on the length of time he/she stays at home.
Answer: A
Diff: 1
Topic: Unemployment
Skill: Conceptual
175
34) Mike has just graduated from college and is now looking for a job, but has not yet found one.
This causes the unemployment rate to ________ and the labor -force participation rate to
________.
A) increase; decrease B) stay the same; stay the same
C) increase; increase D) increase; stay the same
Answer: C
Diff: 2
Topic: Unemployment
Skill: Conceptual
35) Discouraged workers are

A) considered cyclically unemployed.
B) considered structurally unemployed.
C) considered frictionally unemployed.
D) not considered as part of the labor force.
Answer: D
Diff: 2
Topic: Unemployment
Skill: Conceptual
36) In June there are 30,000 people classified as unemployed and the size of the labor force is
600,000. The only change between June and July is that 10,000 of the unemployed give up
looking for work. Which of the following is true?
A) In June the unemployment rate was 6% and in July the unemployment rate was 3.8%.
B) The unemployment rate in both June and July was 5%.
C) In June the unemployment rate was 5% and in July the unemployment rate was 3.39%.
D) In June the unemployment rate was 3.8% and in July the unemployment rate was 6%.
Answer: C
Diff: 3
Topic: Unemployment
Skill: Analytic
37) When 100 people who were previously looking for jobs stop looking for jobs, the
A) unemployment rate increases.
B) size of the labor force decreases.
C) labor-force participation rate does not change.
D) unemployment rate does not change.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Conceptual
176
38) Classifying discouraged workers as unemployed would
A) increase the unemployment rate.
B) decrease the unemployment rate.
C) not change the unemployment rate.
D) have an indeterminate impact on the unemployment rate.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Conceptual
39) In normal times the number of discouraged workers is approximately ________ of the labor
force.
A) .5% B) 4% C) 3% D) 1%
Answer: D
Diff: 1
Topic: Unemployment
Skill: Fact
40) Which of the following groups has the highest unemployment rate among teenagers?
A) white males B) African American males
C) white females D) African American females
Answer: B
Diff: 1
Topic: Unemployment
Skill: Fact
41) Which of the following statements is TRUE?

A) The unemployment rate does not tell us anything about the duration of unemployment.
B) The duration of unemployment decreases during recessions.
C) The duration of unemployment increases during economic expansions.
D) The median duration of unemployment is usually greater than the average duration.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Analytic
42) The labor force participation rate is the

A) total number of people who are participating in the labor force.
B) ratio of the number of employed people to the number of unemployed people.
C) ratio of the labor force to the total population 16 years old or older.
D) the number of people in the labor force minus the number of people who are
unemployed.
Answer: C
Diff: 1
Topic: Unemployment
Skill: Fact
177
43) During recessions, the number of discouraged workers ________ and this ________ the
unemployment rate.
A) falls; reduces B) decreases; increases
C) increases; reduces D) increases; increases
Answer: C
Diff: 2
Topic: Unemployment
Skill: Conceptual
44) The Humphrey-Hawkins Act formally established a specific unemployment target for the
economy of
A) 2%. B) 4%. C) 6%. D) 8%.
Answer: B
Diff: 1
Topic: Unemployment
Skill: Fact
45) When an economics professor quits his/her job at a university and starts looking for a better
job in another university, he/she is
A) frictionally unemployed. B) structurally unemployed.
C) cyclically unemployed. D) naturally unemployed.
Answer: A
Diff: 1
Topic: Unemployment
Skill: Conceptual
46) Increasing the efficiency of various employment agencies to find better matches for those
looking for jobs will
A) reduce the natural rate of unemployment.
B) reduce structural unemployment.
C) reduce cyclical unemployment.
D) not affect frictional unemployment.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Conceptual
47) A man is fired from his job because he was late for work too many times. While he is searching
for another job he would be classified as
A) not in the labor force because his employer had a legitimate reason for firing him.
B) structurally unemployed.
C) cyclically unemployed.
D) frictionally unemployed.
Answer: D
Diff: 2
Topic: Unemployment
Skill: Conceptual
178
48) When the Fed slows the rate of growth of the money supply to slow down the economy, the
unemployment type that will be directly affected is the
A) frictional unemployment. B) structural unemployment.
C) cyclical unemployment. D) natural rate of unemployment.
Answer: C
Diff: 2
Topic: Unemployment
Skill: Conceptual
49) When an individual is not working and is not looking for a job because he/she lacks any
marketable job skills, he/she is
A) structurally unemployed. B) frictionally unemployed.
C) cyclically unemployed. D) none of the above
Answer: D
Diff: 1
Topic: Unemployment
Skill: Conceptual
50) Structural unemployment is the

A) portion of unemployment that is due to changes in the structure of the economy that
result in a significant loss of jobs in certain industries.
B) unemployment that occurs during recessions and depressions.
C) portion of unemployment that is due to the normal working of the labor market.
D) unemployment that results when people become discouraged about their chances of
finding a job so they stop looking for work.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Definition
51) An auto worker in Ohio who loses her job because the company relocated the plant to another
country represents an example of
C) cyclical unemployment. D) natural unemployment.
Answer: B
Diff: 2
Topic: Unemployment
Skill: Conceptual
179
52) A textile firm closes a plant in Massachusetts and transfers production to a plant in South
Carolina, where the firm can take advantage of cheaper labor. The plant supervisor at the
Massachusetts plant is given the opportunity to move to South Carolina to become the plant
supervisor at that plant. He turns down this opportunity because of family obligations. While
he is searching for a new job he would be classified as
A) structurally unemployed.
B) cyclically unemployed.
C) frictionally unemployed.
D) not in the labor force because he turned down the opportunity to relocate.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Conceptual
53) An individual who cannot find a job because his or her job skills have become obsolete is an
example of
C) cyclical unemployment. D) seasonal unemployment.
Answer: B
Diff: 1
Topic: Unemployment
Skill: Conceptual
54) The natural rate of unemployment is generally thought of as the

A) ratio of the frictional unemployment rate to the cyclical unemployment rate.
B) sum of structural unemployment and cyclical unemployment.
C) sum of frictional unemployment and cyclical unemployment.
D) sum of frictional unemployment and structural unemployment.
Answer: D
Diff: 1
Topic: Unemployment
Skill: Definition
55) The sum of frictional and structural unemployment is thought of as the

A) natural rate of unemployment. B) normal rate of unemployment.
C) cyclical rate of unemployment. D) seasonal rate of unemployment.
Answer: A
Diff: 1
Topic: Unemployment
Skill: Definition
56) Estimates for the natural rate of unemployment in the United States range from
A) 4% to 6%. B) 4% to 10%. C) 4% to 5%. D) 4% to 8%.
Answer: A
Diff: 1
Topic: Unemployment
Skill: Fact
180
57) If the labor market becomes more efficient so that the unemployed are more quickly matched
with jobs, then
A) the natural rate of unemployment will increase.
B) the natural rate of unemployment will decrease.
C) the natural rate of unemployment will not change.
D) the natural rate of unemployment could either increase or decrease.
Answer: B
Diff: 1
Topic: Unemployment
Skill: Conceptual
58) During the early 1990s, companies started downsizing. One of the results of this downsizing
was the permanent reduction in the number of middle management positions. This change in
the way businesses operate would have
A) increased the natural rate of unemployment.
B) decreased the natural rate of unemployment.
C) not affected the natural rate of unemployment.
D) could have either increased or decreased the natural rate of unemployment.
Answer: A
Diff: 2
Topic: Unemployment
Skill: Conceptual
59) The increase in unemployment that occurs during recessions and depressions is called
C) cyclical unemployment. D) normal unemployment.
Answer: C
Diff: 1
Topic: Unemployment
Skill: Definition
60) Cyclical unemployment is the

A) portion of unemployment that is due to changes in the structure of the economy that
result in a significant loss of jobs in certain industries.
B) unemployment that occurs during recessions and depressions.
C) portion of unemployment that is due to the normal working of the labor market.
D) unemployment that results when people become discouraged about their chances of
finding a job so they stop looking for work.
Answer: B
Diff: 1
Topic: Unemployment
Skill: Definition
181
61) The demand for refrigerators falls when the economy enters a downturn. If a refrigerator
manufacturer lays off workers during an economic downturn, this would be an example of
A) frictional unemployment. B) natural unemployment.
C) structural unemployment. D) cyclical unemployment.
Answer: D
Diff: 1
Topic: Unemployment
Skill: Conceptual
62) The economy is in a recession and the housing market is in a slump. As a result of this, a real
estate firm lays off half of its real estate agents. This is an example of
C) cyclical unemployment. D) natural unemployment.
Answer: C
Diff: 1
Topic: Unemployment
Skill: Conceptual
63) During the severe recession of the early 1980s, cyclical unemployment increased as the
recession continued. This increase in cyclical unemployment would have
A) increased the natural rate of unemployment.
B) decreased the natural rate of unemployment.
C) had no effect on the natural rate of unemployment.
D) caused structural unemployment to decrease.
Answer: C
Diff: 2
Topic: Unemployment
Skill: Conceptual
64) During the Great Depression, real output fell by approximately ________ and the
unemployment rate rose to about ________.
A) 15%; 15% B) 25%; 30% C) 30%; 40% D) 30%; 25%
Answer: D
Diff: 1
Topic: Unemployment
Skill: Fact
65) Recessions today may cause lost output in the future because during a recession
A) consumption tends to fall.
B) investment tends to fall.
C) imports tend to fall.
D) government spending tends to increase.
Answer: B
Diff: 3
Topic: Unemployment
Skill: Conceptual
182
66) Related to the Economics in Practice on p. 127 [439]: In the U.S. from 1955 to 1996, the labor force
participation rate ________ for men and ________ for women.
A) increased; increased B) increased; decreased
C) decreased; increased D) decreased; decreased
Answer: C
Diff: 1
Topic: Unemployment: Economics in Practice
Skill: Fact
67) Related to the Economics in Practice on p. 127 [439]: If more women enter the labor force and the
number of available jobs remains unchanged, the unemployment rate will, ceteris paribus,
A) increase.
B) decrease.
C) remain unchanged.
D) equal the natural rate of unemployment.
Answer: A
Diff: 2
Topic: Unemployment: Economics in Practice
Skill: Conceptual
2 True/False
1) When more people who are not working start looking for jobs, the labor -force participation
rate increases.
Answer: TRUE
Diff: 2
Topic: Unemployment
Skill: Conceptual
2) Labor productivity is total output divided by the total number of worker hours.
Answer: TRUE
Diff: 1
Topic: Unemployment
Skill: Definition
3) An increase in search costs will decrease structural unemployment.

Answer: FALSE
Diff: 2
Topic: Unemployment
Skill: Conceptual
4) The natural rate of unemployment is the unemployment rate during a period of full
employment.
Answer: TRUE
Diff: 1
Topic: Unemployment
Skill: Definition
183
5) Anyone 16 years of age or older who is not classified as employed is classified as unemployed.
Answer: FALSE
Diff: 2
Topic: Unemployment
Skill: Conceptual
6) If discouraged workers were counted as unemployed, the measured unemployment rate

would increase.
Answer: TRUE
Diff: 2
Topic: Unemployment
Skill: Conceptual
7) An unemployment rate of 10% means that the average worker has been unemployed for 10%
of the year.
Answer: FALSE
Diff: 1
Topic: Unemployment
Skill: Conceptual
8) If labor markets were perfectly efficient, the unemployment rate would fall to zero.
Answer: FALSE
Diff: 2
Topic: Unemployment
Skill: Conceptual
9) The natural rate of unemployment in the economy is determined by the Congress and the
president of the country.
Answer: FALSE
Diff: 1
Topic: Unemployment
Skill: Fact
7.2 Inflation
1 Multiple Choice
1) In which of the following conditions is the inflation rate likely to fall and the unemployment
rate likely to rise?
A) hyperinflation B) recession C) boom D) stagflation
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
184
2) Which of the following statements is TRUE?
A) The costs of recessions are distributed equally among all groups of the population.
B) Recessions tend to increase the demand for imports and therefore improve the nationʹs
balance of payments.
C) Recessions may increase efficiency by driving the least efficient firms in the economy out
of business.
D) A recession may lead to an increase in the inflation rate.
Answer: C
Diff: 3
Topic: Inflation
Skill: Analytic
3) An economic boom tends to ________ the demand for imports, which ________ a nationʹs
balance of payments.
A) reduce; worsens. B) reduce; improves.
C) increase; improves. D) increase; worsens.
Answer: D
Diff: 2
Topic: Inflation
Skill: Analytic
4) The floods of 1993 caused the price of corn to increase. This is an example of
A) inflation. B) deflation.
C) a sustained inflation. D) the operations of supply and demand.
Answer: D
Diff: 2
Topic: Inflation
Skill: Conceptual
5) The decrease in the demand for mainframe computers caused manufacturers of mainframe
computers to reduce prices by 20%. This is an example of
A) inflation. B) deflation.
C) a sustained inflation. D) the operations of supply and demand.
Answer: D
Diff: 2
Topic: Inflation
Skill: Conceptual
6) Inflation is an increase in
A) the price of one item. B) the overall price level.
C) the average income level. D) real gross national product.
Answer: B
Diff: 1
Topic: Inflation
Skill: Definition
185
7) An increase in the overall price level is
A) inflation. B) deflation. C) a price index. D) a recession.
Answer: A
Diff: 1
Topic: Inflation
Skill: Definition
8) Deflation is a decrease in
A) the price of one item. B) the overall price level.
C) the average income level. D) real gross national product.
Answer: B
Diff: 1
Topic: Inflation
Skill: Definition
9) An increase in the overall price level that continues over a significant period of time is
A) high inflation. B) sustained recovery.
C) sustained inflation. D) super inflation.
Answer: C
Diff: 1
Topic: Inflation
Skill: Definition
10) A price index is

A) a measurement showing how the average price of a bundle of goods changes over time.
B) a measurement showing the cost of a bundle of goods at a point in time.
C) a sustained increase in the overall price level.
D) a decrease in the overall price level.
Answer: A
Diff: 1
Topic: Inflation
Skill: Definition
Table 7.3
Price per Unit in
Units Purchased 2005 2006 2007 2008
Blueberries 8 $2.00 $2.00 $2.10 $2.40
Pineapples 5 $2.00 $2.50 $2.50 $3.00
Cheese 3 $2.50 $3.00 $3.50 $4.00
11) Refer to Table 7.3. Suppose 2006 is the base year. The price index in 2006 is
A) 1,000. B) 100. C) 1. D) 10.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
186
12) Refer to Table 7.3. If 2006 is the base year, the price index in 2005 is
A) 96.0. B) 104.0. C) 111.9. D) 89.3.
Answer: D
Diff: 2
Topic: Inflation
Skill: Analytic
A) 93.9. B) 106.1. C) 94.2. D) 105.8.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
14) Refer to Table 7.3 If 2006 is the base year, the price index in 2008 is
A) 81.2. B) 118.8. C) 123.2. D) 86.8.
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
15) Refer to Table 7.3. If 2006 is the base year, the inflation rate between 2006 and 2007 is
A) 3.9%. B) 10.2%. C) 7.4%. D) 6.1%.
Answer: D
Diff: 3
Topic: Inflation
Skill: Analytic
16) Refer to Table 7.3. If 2006 is the base year, the inflation rate between 2006 and 2007 is ________
%, and the inflation rate between 2007 and 2008 is ________ %.
A) 7.4; 13.9 B) 6.1; 16.1 C) 3.9; 17.1 D) 10.2; 10.4
Answer: B
Diff: 3
Topic: Inflation
Skill: Analytic
17) Refer to Table 7.3. The lowest inflation rate is between the years
A) 2007 and 2008.
B) 2006 and 2007.
C) 2005 and 2006.
D) cannot be determined from the given information
Answer: B
Diff: 3
Topic: Inflation
Skill: Analytic
187
Table 7.4
Price per Unit in
Units Purchased 2006 2007 2008
Good A 5 $1.00 $1.50 $1.50
Good B 10 $2.00 $2.50 $3.00
Good C 4 $4.00 $4.50 $5.00
18) Refer to Table 7.4. The bundle price for the goods in period 2006 is
A) $100. B) $41. C) $50.50. D) $57.50.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
19) Refer to Table 7.4. If 2006 is the base period, the price index in 2006 is
A) 1000. B) 100. C) 10. D) 1.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
A) 81.9. B) 123.2. C) 119.1. D) 76.8.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
A) 71.3. B) 140.2. C) 59.8. D) 128.7.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
A) 12.4%. B) 19.1%. C) 23.2%. D) 17.6%.
Answer: C
Diff: 3
Topic: Inflation
Skill: Analytic
188
A) 28.7%. B) 17.4%. C) 25.1%. D) 40.2%.
Answer: D
Diff: 3
Topic: Inflation
Skill: Analytic
A) 12.2%. B) 7.0%. C) 13.9%. D) 9.4%.
Answer: C
Diff: 3
Topic: Inflation
Skill: Analytic
25) If period 1 is the base year, the bundle price of goods in period 1 is $300, and the bundle price
of goods in period 2 is $320, the period 2 price index is
A) 93.8. B) 106.2. C) 93.3. D) 106.7.
Answer: D
Diff: 2
Topic: Inflation
Skill: Analytic
26) If 2007 is the base year, the bundle price of goods in 2007 is $500, and the bundle price of
goods in 2008 is $700, the 2008 price index is
A) 128.6. B) 140.0. C) 71.4. D) 60.0.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
27) If the price index in period 2 is 109 and the price index in period 3 is 125, the rate of inflation
between period 2 and period 3 is
A) 16%. B) 9%. C) 14.7%. D) 8.7%.
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
189
28) If 2007 is the base year and the inflation rate between 2007 and 2008 is 6.4%, the price index in
2008 is
A) 16.4.
B) 106.4.
C) 64.
D) cannot be determined from this information because the index in the base year is not
given
Answer: B
Diff: 3
Topic: Inflation
Skill: Analytic
29) If 2007 is the base year and the inflation rate between 2007 and 2008 is -4.5, the price index in
2008 is
A) 104.5.
B) -145.
C) 95.5.
D) cannot be determined from this information because the base year is not known
Answer: C
Diff: 3
Topic: Inflation
Skill: Analytic
30) If the price index in 2007 is 115 and the price index in 2008 is 102, the rate of inflation between
2007 and 2008 is
A) 12.7%. B) -11.3%. C) -13.0%. D) 13.0%.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
31) The index used most often to measure inflation is the

A) producer price index. B) consumer price index.
C) wholesale price index. D) GDP deflator.
Answer: B
Diff: 1
Topic: Inflation
Skill: Fact
32) If the CPI in 2007 was 114.7 and the CPI in 2008 was 124.5, then the rate of inflation between
2007 and 2008 was
A) 9.8%. B) 8.5%. C) 7.9%. D) 14.7%.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
190
33) If the CPI in 2007 was 104 and the CPI in 2008 was 106, then the rate of inflation between 2007
and 2008 was
A) 2.0%. B) 1.92%. C) 1.89%. D) 2.2%.
Answer: B
Diff: 2
Topic: Inflation
Skill: Analytic
34) If the CPI in period 1 is 180 and the CPI in period 2 is 240, then the rate of inflation between
period 1 and period 2 is
A) 66.7%. B) 25%. C) 33.33%. D) 50%.
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
35) The CPI in period 1 is 300 and the CPI in period 2 is 150. The rate of inflation between period 1
and period 2 is
A) -50%. B) -100%. C) 33.33%. D) -60%.
Answer: A
Diff: 2
Topic: Inflation
Skill: Analytic

A) One problem with any fixed-bundle index as a measure of the cost of living is that it
does not account for substitutions that consumers might make in response to price
changes.
B) The producer price index is considered to be a leading indicator of future inflation rates.
C) The best overall indicator of inflationary pressures in the economy is the GDP deflator.
D) The consumer price index somewhat understates changes in the cost of living.
Answer: D
Diff: 3
Topic: Inflation
Skill: Fact
37) A price index that tends to be a leading indicator of future inflation rates is the
A) consumer price index. B) producer price index.
C) GDP price index. D) retail price index.
Answer: B
Diff: 3
Topic: Inflation
Skill: Fact
191
38) The broadest-based price index available is the
A) GDP deflator. B) producer price index.
C) consumer price index. D) wholesale price index.
Answer: A
Diff: 2
Topic: Inflation
Skill: Fact
39) Most economists consider the ________ as the best overall indicator of inflationary pressures in
the economy.
A) producer price index B) GDP deflator
C) wholesale price index D) consumer price index
Answer: B
Diff: 1
Topic: Inflation
Skill: Fact

A) An individual living on a fixed income is always made worse off as a result of inflation.
B) Those individuals receiving welfare benefits have been harmed by inflation because
increases in welfare payments have not kept pace with inflation.
C) Inflation will have no effect on an individual whose income is indexed to the inflation
rate.
D) Some people in society benefit from inflation.
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
41) The difference between the interest rate on a loan and the inflation rate is the
A) nominal interest rate. B) inflation premium.
C) real interest rate. D) expected interest rate.
Answer: C
Diff: 2
Topic: Inflation
Skill: Definition
42) Which of the following increases the real interest rate?

A) a decrease in the nominal interest rate, holding the inflation rate constant
B) an increase in both the nominal interest rate and the inflation rate by the same percentage
points
C) a decrease in the inflation rate, holding the nominal interest rate constant
D) a decrease in both the nominal interest rate and the inflation rate by the same percentage
points
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
192
43) If Mr. Garrison is paid an interest rate of 4% on his savings, but the inflation rate is 7%, the
real interest rate Mr. Garrison earns is
A) 4%. B) -3%. C) -7%. D) 28%.
Answer: B
Diff: 1
Topic: Inflation
Skill: Analytic
44) You want to make a 10% real return on a loan that you are planning to make, and the expected
inflation rate during the period of the loan is 4%. You should charge a nominal interest rate of
A) 6%. B) -6%. C) 10%. D) 14%.
Answer: D
Diff: 2
Topic: Inflation
Skill: Analytic
45) Lola wants to make an 6% real return on a loan that she is planning to make, and the expected
inflation rate during the period of the loan is 5%. She should charge an interest rate of
A) 6%. B) 16%. C) 11%. D) 1%.
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
46) If the inflation rate is smaller than the nominal interest rate, the real interest rate is
A) positive. B) negative.
C) zero. D) either positive or zero.
Answer: A
Diff: 2
Topic: Inflation
Skill: Analytic
47) Eliza wants to borrow $100 from Sandy. Sandy wants to make 4% real return on his money, so
they both agree on a 4% interest rate paid next year. Eliza and Sandy did not anticipate any
inflation, yet the actual inflation turned out to be -5% next year. In this case,
A) Eliza will pay an 9% real interest rate.
B) Sandy is better off.
C) Eliza will pay a 4% nominal interest rate.
D) all of the above
Answer: D
Diff: 2
Topic: Inflation
Skill: Analytic
193
48) Dean borrows $400 from Tim. Tim wants to make a 10% real return on his money, so they
both agree on a 10% interest rate paid next year. Dean and Tim did not anticipate any
inflation, yet the actual inflation turned out to be 4% next year. In this case,
A) Tim is better off.
B) Dean will pay $56 a year from now on.
C) Dean is better off.
D) Tim will receive more than 10% of real rate of return a year from now.
Answer: C
Diff: 2
Topic: Inflation
Skill: Analytic
49) Which of the following is a cost of anticipated inflation?

A) Debtors are made worse off.
B) If people are not fully informed about the price level changes, resources will be
misallocated.
C) The degree of risk associated with investments in the economy increases.
D) Creditors are made worse off.
Answer: B
Diff: 2
Topic: Inflation
Skill: Conceptual
50) Stopping inflation

A) can only benefit the economy, because the price level will be reduced.
B) may be costly, if the inflation is stopped by inducing a recession.
C) may be costly, but the benefits of stopping inflation will always outweigh the costs of
such actions.
D) will have no benefits or costs associated with it.
Answer: B
Diff: 2
Topic: Inflation
Skill: Conceptual

A) Whether you gain or lose during a period of inflation depends on whether your income
rises faster or slower than the prices of the things you buy.
B) Inflation that is higher than expected benefits debtors, and inflation that is lower than
expected benefits creditors.
C) There are no costs or losses associated with anticipated inflation.
D) When unanticipated inflation occurs regularly, the degree of risk associated with
investments in the economy increases.
Answer: C
Diff: 3
Topic: Inflation
Skill: Analytic
194
52) When unanticipated inflation occurs regularly, the degree of risk associated with investments
in the economy
A) increases. B) decreases.
C) remains stable. D) falls to zero.
Answer: A
Diff: 3
Topic: Inflation
Skill: Conceptual
53) Which of the following is TRUE?

A) A recession will lead to reduced output in the future, but inflation has no effect on future
output.
B) Both recessions and inflations may reduce output in the future.
C) A recession will lead to reduced output in the future, but inflation will lead to increased
output in the future.
D) A recession will lead to increased output in the future, but inflation will lead to
decreased output in the future.
Answer: B
Diff: 2
Topic: Inflation
Skill: Conceptual
2 True/False
1) The CPI somewhat overstates changes in the cost of living because it does not allow for
substitutions that consumers might make in response to price changes.
Answer: TRUE
Diff: 3
Topic: Inflation
Skill: Analytic
2) A 100% increase in the price of salt changes the CPI more than a 10% increase in rent.
Answer: FALSE
Diff: 2
Topic: Inflation
Skill: Fact
3) An inflation rate that is lower than expected benefits creditors.

Answer: TRUE
Diff: 3
Topic: Inflation
Skill: Conceptual
4) There are no costs associated with inflation if the inflation rate is perfectly anticipated.
Answer: FALSE
Diff: 2
Topic: Inflation
Skill: Conceptual
195
5) The actual real rate of interest is the nominal rate less the actual inflation rate.
Answer: TRUE
Diff: 2
Topic: Inflation
Skill: Definition
7.3 Long-Run Growth

1 Multiple Choice
1) Which of the following is NOT a desirable feature in an economy?

A) rapid increase in output per worker B) rapid increase in the general price level
C) low unemployment D) low inflation
Answer: B
Diff: 1
Topic: Long-Run Growth
Skill: Conceptual
2) Which of the following is a desirable characteristic in an economy?

A) high inflation B) rapid increase in the general price level
C) low unemployment D) low employment
Answer: C
Diff: 1
Skill: Conceptual

A) growing per capita output
B) rapid increase in the general price level
C) population growing the same rate as output
D) population growing faster than output
Answer: A
Diff: 1
Skill: Conceptual

A) growing per capita output B) high inflation
C) cyclical unemployment D) sustained deflation
Answer: A
Diff: 1
Skill: Conceptual
196
5) Output in an economy can be increased by
A) adding more workers. B) limiting the work week.
C) using fewer machines. D) decreasing inflation.
Answer: A
Diff: 1
Skill: Conceptual
6) Human capital is
A) the machines people own.
B) the money people have.
C) the mental or physical skills people have.
D) the property people own.
Answer: C
Diff: 2
Skill: Definition
7) The average growth rate of output in the U.S. economy since 1900 has been
A) 3.4%. B) 2.3%. C) 6.3%. D) 10.5%.
Answer: A
Diff: 1
Skill: Fact
8) A prolonged and deep recession is a

A) hyperinflation. B) slowdown.
C) contraction. D) depression.
Answer: D
Diff: 1
Skill: Definition
9) Which of the following is not considered capital?

A) a factory a company builds to produce other output
B) a tractor produced by John Deere
C) the knowledge an individual acquires through education
D) 10,000 U.S. dollars
Answer: D
Diff: 2
Skill: Conceptual
197
2 True/False
1) The only source of economic growth is growth in the number of workers in the economy.
Answer: FALSE
Diff: 2
Skill: Conceptual
2) Workers who take a job related training course are enhancing their human capital.
Answer: TRUE
Diff: 2
Skill: Conceptual
3) If the population is growing as fast the economy, then per capita output is growing.
Answer: FALSE
Diff: 2
Skill: Conceptual
4) If more workers have more capital to work with, then production will increase.
Answer: TRUE
Diff: 2
Skill: Conceptual
5) Productivity is output per worker hour.

Answer: TRUE
Diff: 2
Skill: Definition
198

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Chapter 5 Introduction to Macroeconomics

5.1 Macroeconomic Concerns

1) Which of the following is NOT a topic studied in Macroeconomics?

2) Which of the following is a topic studied in Macroeconomics?

3) Which of the following is a topic studied in Macroeconomics?

7) An increase in the overall price level is known as

12) The trend of the economy is

13) The term business cycle refers to the

14) A period during which aggregate output rises is known as a(n)

15) A period when the economy shrinks is known as

17) In a business cycle, a peak represents the end of

18) In a business cycle, a trough represents the end of

21) A prolonged and deep recession is called

24) Unemployment means that

25) Unemployment implies that in the labor market

26) The unemployment rate equals

34) Which of the following statements is FALSE?

1) Macroeconomics is concerned with inflation or deflation, output growth and unemployment.

8) A recession is usually associated with increasing unemployment.

9) An expansion is usually associated with rising price levels.

10) A recession is associated with a negative rate of growth of the economy.

1) If the central bank decreases the money supply, it is conducting

2) If Congress increases government spending, it is using

3) Government policies regarding taxes and expenditures are called

4) The government implements fiscal policy when it changes

7) The Federal Reserve affecting the supply of money is known as

8) Policies designed to affect the quantity of money are

12) A transfer payment is

14) The major lesson of the circular flow diagram is that

17) The demanders in the goods-and-services market are

18) In which basic market would DVDs be traded?

22) A promissory note issued by a corporation when it borrows money is a

23) Dividends are

24) Which of the following is a CORRECT statement?

25) A capital gain is

2) Contractionary fiscal policy includes raising taxes.

4) A corporate bond is a promissory note issued by a firm when it borrows money.

5) In the circular flow diagram everyoneʹs expenditure is someone elseʹs receipt.

6) A dividend is is paid by shareholders to firms.

5.3 A Brief History of Macroeconomics

3) Which of the following is an assumption used by Classical economists?

4) According to the Classical model, unemployment

6) According to the Classical economists, the economy

8) According to Classical models, the level of employment is determined primarily by

9) According to Keynes, the level of employment is determined by

10) The concept of ʺmarket clearingʺ is adopted and defended by

6) ʺFine tuningʺ is any government attempt to regulate inflation or unemployment.

7) Classical economists believed that economic slowdowns are self-correcting.

5.4 The U.S. Economy Since 1970

1) Since 1970, the U.S. economy has experienced four

2) Since 1970, the U.S. economy has experienced two

5) Refer to Table 5.1. In this economy, a trough existed around the

6) Refer to Table 5.1. In this economy, a peak existed around the

1) Since 1970, the U.S. economy has experienced 2 recessions.

6.1 Gross Domestic Product

2) Gross domestic product measures

3) Which of the following is an example of a final good or service?

4) Which of the following is a good or service counted in GDP?

6) Double counting can be avoided by