Unit 3 Review
Multiple Choice
Identify the choice that best completes the statement or answers the question.
Figure 10-1: Circular Flow Model
____
1. Use the “Circular Flow Model” Figure 10-1. If the circular flow model is in equilibrium (the sum of money
flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to
happen if there is a decrease in investment spending?
A. an increase in the nominal GDP
B. an increase in the real GDP
C. an increase in the unemployment rate
D. an increase in the inflation rate
E. an increase in government spending equal to the decrease in investment spending.
____
2. Use the “Circular Flow Model” Figure 10-1. If the circular flow model is in equilibrium (the sum of money
flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to
happen if there is an increase in exports?
A. a decrease in the nominal GDP
B. a decrease in the real GDP
C. a decrease in the unemployment rate
D. a decrease in the inflation rate
E. an increase in imports
____
3. Use the “Circular Flow Model” Figure 10-1. What are net exports in this economy?
A. $0
B. $30
C. $60
D. $100
E. $200
____
4. Use the “Circular Flow Model” Figure 10-1. In this economy, how does the government finance its purchases
of goods and services?
A.
B.
C.
D.
E.
by printing money
by collecting taxes
by borrowing
By collecting taxes and borrowing
by collecting taxes and selling assets.
____
5. An example of a government transfer is a(n):
A. expenditure on an interstate highway.
B. bequest from a deceased relative.
C. Social Security payment.
D. salary for members of the armed forces.
E. salary earned as an economist with a government agency.
____
6. Disposable income equals:
A. income plus taxes plus government transfers.
B. income plus government spending minus taxes.
C. income minus taxes plus government spending.
D. income minus taxes minus government transfers.
E. income plus government transfers minus taxes.
____
7. GDP is the:
A. total market value of all final goods and services produced in one year.
B. total accumulated wealth of an economy.
C. volume of all dollar transactions made in an economy in one year.
D. dollar amount of all sales made in the economy in one year.
E. total quantity of money in circulation in the economy in one year.
Consumption Spending
Rental Income
Interest
Profit
Investment Spending
Wages
Government Purchases
Imports
Exports
Table 10-2: GDP
$65
10
35
20
15
29
18
7
3
____
8. Use Table 10-2. The GDP for 2007, was:
A. $94 billion.
B. $188 billion.
C. $168 billion.
D. $139 billion.
E. $108 billion.
____
9. An example of an intermediate good will be:
A. wages paid to an employee.
B. steel purchased by the aircraft manufacturers.
C. vegetables purchased for your dinner.
D. electric bills for the office.
E. trucks purchased by the postal service.
____ 10. Which of the following would be classified as consumption?
A. a new computer purchased by Federal Express for one of its corporate executives.
B. a storage facility built for a moving company.
C. a new car purchased by an employee of a company for personal use.
D. a dump truck purchased by a demolition company.
E. a new photocopier purchased for a small consulting firm.
Personal consumption expenditures
$500
Gross private domestic investment
200
Net exports
-5
State and local government purchases of goods
200
and services
Federal government purchases of goods and
100
services
Imports
15
Table 10-4: Measuring GDP (billions of dollars)
____ 11. Use Table 10-4. Government purchases of goods and services are:
A. $50 billion.
B. $100 billion.
C. $200 billion.
D. $300 billion.
E. $1000 billion.
____ 12. A laptop computer purchased by a private individual is considered to be:
A. consumption spending.
B. investment spending.
C. private saving.
D. a transfer of income.
E. a financial investment.
____ 13. Which of the following would be included in the calculation of GDP?
A. expenditure on new construction
B. a retiree's monthly Social Security check
C. buying an existing house
D. buying shares of Home Depot stock
E. volunteering to coach your child’s soccer team.
____ 14. Included as an addition to GDP would be:
A. the dollar value of a used car sold during the period.
B. the dollar value of a new car imported during the period.
C. the dollar value of a new car exported during the period.
D. the purchase of 100 shares of General Motors stock.
E. the dollar value of a do-it-yourself home repair.
____ 15. Suppose a consumer buys a frozen cheese pizza at the grocery store at a price of $10. The frozen pizza company
sold the pizza to the store for $5. The frozen pizza company purchased the pizza dough and tomato sauce from
a food processing company at a price of $2 and bought the cheese from a dairy at a price of $1. How much has
GDP increased?
A.
B.
C.
D.
E.
$2
$5
$10
$18
$15
____ 16. In the circular flow diagram, government purchases of goods and services are financed by:
A. tax revenues.
B. tax revenues net of transfer payments.
C. government borrowing from financial markets.
D. tax revenues plus government borrowing from financial markets.
E. tax revenues net of transfer payments plus government borrowing from financial markets.
____ 17. Suppose only two countries existed in the world. Country A imported $200 million worth of goods and services
from Country B. Country B imported $100 million worth of goods and services from Country A. This means
that net exports for:
A. Country A equals $200 million.
B. Country B equals $200 million.
C. Country A equals –$100 million.
D. Country B equals –$100 million.
E. Country A equals $100 million.
____ 18. Double counting would occur if:
A. GDP was calculated by adding together C, I, G, and NX.
B. used goods were included in the GDP calculation.
C. imports were subtracted from GDP.
D. inventories were added to the GDP calculation.
E. new construction was counted as investment spending.
____ 19. Suppose that nominal GDP is $1000 in 2006 and nominal GDP is $1500 in 2007. If the overall price level ____
between 2006 and 2007, we could say that real GDP _____.
A. increased by more than 50%; stayed constant.
B. increased by less than 50%; decreased.
C. increased by more than 50%; increased.
D. increased by 50%; increased.
E. increased by 50%; stayed constant.
Year
Output
Price per Unit
1
2
$2
2
3
4
3 = base period
4
5
4
6
6
5
7
9
Table 11-2: Price and Output Data
____ 20. Use Table 11-2. The value of Year 2's output in real dollars is:
A. $4.
B. $12.
C. $6.
D. $16.
E. $15.
Gino’s pizza
2008 units of
output
2008 price per
unit
2009 units of
output
2009 price per
unit
4,000
Bruno’s
spaghetti
3,000
Carlo’s cookies
Aldo’s salad
2,000
5,000
$10
$9
$6
$7
4,000
1,000
1,000
2,000
$8
$6
$1
$4
Table 11-4: Pizza Economy III
____ 21. Use Table 11-4. Considering 2008 as the base year, real GDP in 2009 was:
A. $47,000.
B. $69,000.
C. $72,000.
D. $114,000.
E. $55,000
The town of York produces two goods, Good A and Good B. The following is information regarding York's
production of these two goods and their prices the following three years.
Year 2006
Year 2007
Year 2008
Quantity of Good A
3
4
5
Price of Goods A
$500
$550
$550
Quantity of Good B
10
10
10
Price of Good B
$2
$4
$5
Scenario 11-1: Good A and Good B
____ 22. Use Scenario 11-1. In 2007, nominal GDP is:
A. greater than the nominal GDP in 2008.
B. greater than the nominal GDP in 2006.
C. equal to the nominal GDP in 2008.
D. equal to the nominal GDP in 2006.
E. less than the nominal GDP in 2006.
____ 23. The unemployment rate is defined as:
A. the percent of the labor force that is unemployed.
B. the number of people unemployed.
C. the ratio of the labor force to the number of people unemployed.
D. the average length of time someone is unemployed.
E. the percent of the population that is unemployed.
____ 24. In order to be officially unemployed, a person must be:
A. looking for work in the past 4 weeks.
B. under 55 years old.
C. frictionally unemployed.
D. structurally unemployed.
E. retired or a full-time student.
____ 25. If the labor force is 100 million persons and 5 million are unemployed but actively seeking work, then the
unemployment rate is ________.
A. 1%
B. 5%
C. 10%
D. 95%
E. 15%.
Demographic Group
Number of Residents
Employed
5000
Unemployed and looking for
1000
work
Not working due to disability
200
Not working due to retirement
700
Unemployed and not looking for
500
work due to discouragement over
job prospects
Under the age of 16
2400
Total Population
9400
Table 12-3: Population Data for Madtucky
____ 26. Use Table 12-3. What is the unemployment rate in Madtucky?
A. 64%
B. 48%
C. 17%
D. 6%
E. 1%
____ 27. The presence of discouraged workers in the economy tends to:
A. raise the official unemployment rate.
B. lower the official unemployment rate.
C. lower the number of people who are frictionally unemployed.
D. increase the number of people who are structurally unemployed.
E. have no impact on the official unemployment rate.
Scenario 12-1: Employment in youville
The country of Youville is made up of 10,000 people. Of this population, 1,000 residents are below the age of
16 and 2,000 have given up looking for work. Currently, 700 people are unemployed but are actively looking
for work; 2,500 work part time, and the remaining number are fully employed.
____ 28. Use Scenario 12-1. What is the unemployment rate in Youville?
A. 7.14%
B. 4.25%
C. 11.11%
D. 2%
E. 10%
Scenario 12-2: Employment Rate
In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one
unemployed worker, and two full time workers.
____ 29. Use Scenario 12-2. For this group, the labor force participation rate is:
A. 30%.
B. 60%.
C. 70%.
D. 80%.
E. 50%.
____ 30. Unemployment rates tend to:
A. be the same across geographic areas.
B. vary depending upon age groups and ethnicities.
C. increase when an expansion in the economy occurs.
D. stay the same only when there is cyclical unemployment.
E. fall during economic recessions.
____ 31. Last week Stephanie quit her job as a copy-writer at an advertising agency. She has spent the past few days
browsing the help-wanted ads, but hasn't found anything that matches her skills. Stephanie is best classified as:
A. structurally unemployed.
B. frictionally unemployed.
C. a discouraged worker.
D. out of the labor force.
E. cyclically unemployed.
____ 32. A minimum wage in a labor market is set _____ the equilibrium wage and creates a _____ of labor.
A. below; surplus
B. equal to; an efficient allocation
C. above; surplus
D. above; shortage
E. below; shortage
Figure 13-1: Minimum Wage
____ 33. Use the “Minimum Wage” Figure 13-1. The binding minimum wage of P3 leads to unemployment of:
A. Q3 – Q1.
B. Q3 – Q2.
C. zero.
D. Q4 – Q2.
E. Q4 – Q1.
Figure 13-2: Effect of Minimum Wage
____ 34. Use the “Effect of Minimum Wage” Figure 13-2. Suppose the labor market is in equilibrium at E when the
government introduces a minimum wage of WF. One problem that may arise is that the quantity of labor
supplied would ______, resulting in structural unemployment.
A. decrease to QD
B. stay at QE
C. increase to QS
D. stay at WE
E. decrease to zero.
____ 35. A minimum wage of $7.25 per hour might cause structural unemployment if the equilibrium wage in that labor
market is:
A. $7.25.
B. $8.00.
C. $10.00.
D. $7.30.
E. $6.85.
____ 36. Cyclical unemployment:
A. rises during recession.
B. falls during recession.
C. rises during expansion.
D. is a part of natural unemployment.
E. is at its highest levels at the peak of the business cycle.
____ 37. The natural rate of unemployment:
A. includes frictional, structural, and cyclical unemployment.
B. is equal to zero.
C. is always greater than the actual unemployment rate.
D. includes structural and frictional unemployment.
E. is equal to zero when there is no cyclical unemployment.
____ 38. Ron quit his job in retail management and moved to Florida with his wife, a physician who opened a new
practice there. He was not successful in his job search for the next four months. This type of unemployment is
known as:
A. structural unemployment.
B. cyclical unemployment.
C. frictional unemployment.
D. seasonal unemployment.
E. natural unemployment.
____ 39. Structural changes in an economy as well as changes in consumer tastes are reasons for:
A. job creation and job destruction.
B. job searches.
C. unemployment during recessions.
D. unemployment during expansions.
E. business cycles.
____ 40. When hyperinflation forces Emily to visit her bank very frequently to keep her cash holdings to a minimum,
economists say that Emily is experiencing a:
A. search cost.
B. menu cost.
C. unit-of-account cost.
D. Fisher effect.
E. shoe-leather cost.
____ 41. Menu costs of inflation are the:
A. costs associated with money being a less reliable unit of measurement.
B. costs of transactions associated with avoiding the inflation tax.
C. costs associated with businesses changing prices.
D. revenue the government gets from printing money.
E. costs associated with negotiating lower prices.
____ 42. Unanticipated inflation:
A. helps those on fixed incomes.
B. hurts borrowers and helps lenders.
C. helps borrowers and hurts lenders.
D. causes nominal interest rates to decrease.
E. causes people to hold more cash.
____ 43. When there is deflation in the economy:
A. the general price level falls.
B. the general price level increases.
C. the nominal interest rate rises.
D. the general price level becomes negative.
E. the Consumer Price Index becomes negative.
____ 44. If money income remains the same, while the average price level doubles, then:
A. nominal income will fall.
B. real income will fall.
C. nominal interest rates will fall.
D. purchasing power will rise.
E. home mortgage interest rates are likely to fall.
____ 45. Suppose the real interest rate is 2.1% and the nominal interest rate is 5.4%. Then the expected inflation rate is:
A.
B.
C.
D.
E.
7.5%.
3.3%.
–3.3%.
2.1%.
5.4%.
____ 46. Unanticipated inflation:
A. reduces the value of money.
B. increases the value of future obligations.
C. increases certainty about the future.
D. helps lenders.
E. harms borrowers.
____ 47. You have gone to the bank to borrow money for one year. The nominal rate is 7.5%. The real rate of interest is
4%. Over the course of the year, overall prices increased by 4%. This rate of inflation hurt the _____ because
the actual rate of inflation was _____ than the anticipated rate of inflation.
A. borrower; lower
B. borrower; higher
C. lender; higher
D. lender; lower
E. lender; equal to
____ 48. If the consumer price index changes from 120 to 125 between December 2007 and December 2008, the:
A. inflation rate for 2008 is 4.2%.
B. inflation rate for 2008 is 5%.
C. deflation rate for 2008 is 5%.
D. deflation rate for 2008 is –4.2%.
E. inflation rate for 2008 is 10%.
____ 49. You read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008
would have cost
A. 20 percent more than the same market basket purchased in 2007.
B. 120 percent more than the same market basket purchased in 2007.
C. 20 percent more than the same market basket purchased in the base year.
D. 120 percent more than the same market basket purchased in the base year.
E. 20 percent less than the same market basket purchased in the base year.
Year
CPI
2007
125
2008
120
Table 15-3: CPI II
____ 50. Use Table 15-3. Calculate by how much the prices changed between 2007 and 2008.
A. Prices decreased by 5%.
B. Prices decreased by 4%.
C. Prices increased by 4%.
D. Prices increased by 5%.
E. Prices decreased by 20%.
Unit 3 Review
Answer Section
MULTIPLE CHOICE
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22. ANS:
C
PTS:
Critical Thinking
C
PTS:
Critical Thinking
A
PTS:
Critical Thinking
B
PTS:
Critical Thinking
C
PTS:
Concept-Based
E
PTS:
Definitional
A
PTS:
Definitional
A
PTS:
Critical Thinking
B
PTS:
Critical Thinking
C
PTS:
Concept-Based
D
PTS:
Critical Thinking
A
PTS:
Concept-Based
A
PTS:
Concept-Based
C
PTS:
Concept-Based
C
PTS:
Critical Thinking
E
PTS:
Fact-Based
C
PTS:
Critical Thinking
B
PTS:
Critical Thinking
E
PTS:
Analytical Thinking
E
PTS:
Critical Thinking
B
PTS:
Critical Thinking
B
PTS:
1
DIF: M
REF: Module 10
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REF: Module 10
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REF: Module 10
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DIF: M
REF: Module 10
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DIF: M
REF: Module 10
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DIF: M
REF: Module 11
1
DIF: M
REF: Module 11
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DIF: M
REF: Module 11
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DIF: M
REF: Module 11
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Critical Thinking
A
PTS:
Definitional
A
PTS:
Fact-Based
B
PTS:
Critical Thinking
C
PTS:
Critical Thinking
B
PTS:
Concept-Based
E
PTS:
Analytical Thinking
E
PTS:
Critical Thinking
B
PTS:
Fact-Based
B
PTS:
Concept-Based
C
PTS:
Concept-Based
E
PTS:
Critical Thinking
C
PTS:
Concept-Based
E
PTS:
Critical Thinking
A
PTS:
Concept-Based
D
PTS:
Definitional
C
PTS:
Definitional
A
PTS:
Fact-Based
E
PTS:
Definitional
C
PTS:
Definitional
C
PTS:
Concept-Based
A
PTS:
Concept-Based
B
PTS:
Concept-Based
B
PTS:
Concept-Based
A
PTS:
Concept-Based
1
DIF: M
REF: Module 12
1
DIF: M
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DIF: M
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DIF: M
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DIF: M
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DIF: M
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DIF: M
REF: Module 14
1
DIF: M
REF: Module 14
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DIF: M
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DIF: M
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DIF: M
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DIF: M
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47. ANS:
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48. ANS:
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49. ANS:
SKL:
50. ANS:
SKL:
C
PTS:
Critical Thinking
A
PTS:
Critical Thinking
C
PTS:
Concept-Based
B
PTS:
Critical Thinking
1
DIF: M
REF: Module 14
1
DIF: M
REF: Module 15
1
DIF: M
REF: Module 15
1
DIF: M
REF: Module 15