Practice Exam II Fall 2012 Key
1. Business cycles are generally considered in:
A. the short-run framework.
B. the long-run framework.
C. both the short-run and long-run frameworks.
D. neither the short-run nor the long-run frameworks.
Since business cycles are a short-run phenomenon, they are generally considered in the short-run
framework.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #11
Difficulty: Easy
Learning Objective: 7-1
Topic: Business Cycles
2. If a country's real GDP and population are, respectively, $500 billion and 200 million, then its
per capita real output is:
A. $250.
B. $1,000.
C. $2,500.
D. $10,000.
To compute per capita real GDP, divide a country's real GDP ($500 billion) by its population
(200 million.)
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 07 #20
Difficulty: Easy
Learning Objective: 7-2
Topic: Real GDP
3. Fluctuations around the long-term growth rate are called:
A. recessions.
B. depressions.
C. expansions.
D. business cycles.
See the definition of a business cycle in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #31
Difficulty: Medium
Learning Objective: 7-3
Topic: Business Cycles
4. The top of the business cycle is called:
A. an expansion.
B. a recession.
C. an upturn.
D. a peak.
See the figure "Business Cycle Phases" in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #39
Difficulty: Easy
Learning Objective: 7-3
Topic: Business Cycles
5. During the business cycle, an economic expansion occurs:
A. at the peak of the business cycle.
B. at the trough of a business cycle.
C. in between the peak and trough.
D. in between the trough and peak.
See the figure "Business Cycle Phases" in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #40
Difficulty: Easy
Learning Objective: 7-3
Topic: Business Cycles
Colander - Chapter 07
6. Refer to the graph above. A movement from points A to D represents a(n):
A. trough.
B. peak.
C. recession.
D. expansion
An expansion occurs when output rises.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #45
Difficulty: Easy
Learning Objective: 7-3
Topic: Business Cycles
7. People who work part-time, or have a full-time job that doesn't use all their skills, are included
in:
A. the underemployed.
B. discouraged workers.
C. phantom employment.
D. cyclical unemployment.
Discouraged workers don't have jobs. See definition of underemployed in the text.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #63
Difficulty: Easy
Learning Objective: 7-4
Topic: Unemployment
8. Some economists talk about a non-accelerating inflation rate of unemployment (NAIRU). The
term the text uses for this concept is:
A. the natural rate of unemployment.
B. cyclical unemployment.
C. structural unemployment.
D. the target rate of unemployment.
See the definition of the target rate of unemployment in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #75
Difficulty: Easy
Learning Objective: 7-4
Topic: Unemployment
9. The unemployment that occurs when people first enter the labor force or are in the process of
changing jobs, is called:
A. frictional unemployment.
B. cyclical unemployment.
C. natural unemployment.
D. structural unemployment.
See the definition of frictional unemployment in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #82
Difficulty: Easy
Learning Objective: 7-4
Topic: Unemployment
10. Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the
United States. Through trade negotiations, the United States lifted quotas limiting the import of
tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close
their farms and let go their workers. Many of the workers could not find new jobs right away.
What type of unemployment describes the workers' situation?
A. Cyclical unemployment.
B. Full unemployment.
C. Structural unemployment.
D. Target unemployment.
Structural unemployment is unemployment caused by economic restructuring. Lifting quotas
falls under economic restructuring.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 07 #86
Difficulty: Medium
Learning Objective: 7-4
Topic: Unemployment
11. The target rate of unemployment:
A. remains always at 0 percent.
B. remains always at 2 percent.
C. remains always at 5 percent.
D. always changes.
The target rate of unemployment varies as demographics change, as a society's social and
institutional structure changes, and as the relationship between inflation and unemployment
changes.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #91
Difficulty: Easy
Learning Objective: 7-4
Topic: Unemployment
12. With respect to the unemployment problem, Keynesian economists generally take the
position that:
A. government should guarantee each person a satisfying and high-paying job.
B. government should eliminate only frictional unemployment.
C. each person should have a job commensurate with their training or past job experience.
D. individuals should be responsible for finding their own jobs.
A guarantee of a satisfying and high-paying job exceeds the position of Keynesian economists
that each person should have a job commensurate with his/her training and past experience.
AACSB: Reflective Thinking
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 07 #94
Difficulty: Medium
Learning Objective: 7-4
Topic: Unemployment
13. Keeping total employment the same, an increase in the number of people available and
looking for work will:
A. increase both the labor force participation rate and the employment-population ratio.
B. increase the labor force participation rate but decrease the employment-population ratio.
C. decrease the labor force participation rate but increase the employment-population ratio.
D. decrease both the labor force participation rate and the employment-population ratio.
The labor force participation rate will increase as a greater percentage of the population enters
the labor force but the employment-population ratio will decrease as a smaller fraction of the
labor force is employed.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 07 #109
Difficulty: Easy
Learning Objective: 7-4
Topic: Unemployment
14. When the rate of capacity utilization is relatively low and the unemployment rate is relatively
high:
A. the economy is below potential output.
B. the economy is at potential output.
C. the economy is above potential output.
D. potential output cannot be determined.
This combination leads to relatively low levels of output, so actual output should be beneath
potential output.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #112
Difficulty: Easy
Learning Objective: 7-5
Topic: Business Cycles
15. The price index that measures the average rate of change in the prices received by domestic
producers of goods and services is called the:
A. PCE deflator.
B. CPI.
C. GDP deflator.
D. PPI.
See the definition of the producer price index (PPI) in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 07 #129
Difficulty: Easy
Learning Objective: 7-6
Topic: Inflation
16. Suppose the GDP deflator was 100 in 2008 and 95 in 2009. If nominal GDP in 2009 was 1%
smaller than in 2008, then the rate of real GDP growth in 2009 was:
A. -5.0 percent.
B. -4.0 percent.
C. 4.0 percent.
D. 5.0 percent.
The percentage change in real output equals the percentage change in nominal output (-1
percent) less the percentage change in the price level (-5 percent).
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 07 #151
Difficulty: Hard
Learning Objective: 7-6
Topic: Real GDP
17. The largest expenditure component of GDP is:
A. consumption.
B. investment.
C. net exports.
D. government spending.
See the table in the textbook, "Expenditure Breakdown of GDP for Selected Countries."
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 08 #19
Difficulty: Easy
Learning Objective: 8-1
Topic: Components of GDP
18. If you decide not to spend $1,000 you earned at your summer job but instead intend to buy
shares in a mutual fund, in terms of aggregate economic accounting you would be:
A. consuming.
B. saving.
C. investing.
D. transferring.
Saving is done by persons who do not spend income. What is called investing in everyday
speech is not the same as investing in aggregate or national income accounting.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 08 #20
Difficulty: Easy
Learning Objective: 8-1
Topic: Components of GDP
19. If nominal wealth increases faster than real wealth,
A. real wealth must eventually decline.
B. real wealth will eventually rise faster in order to catch up.
C. asset inflation has occurred.
D. society is better off than if nominal wealth growth had matched real wealth growth.
Asset inflation occurs when asset market prices increase faster than the economy's ability to
produce. Society is not better off because real wealth is what matters to living standards, not
nominal wealth.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #33
Difficulty: Easy
Learning Objective: 8-1
Topic: Stock and Flow Concepts
20. If an economy produces 100 pencils and 100 pens and pencils sell for twice as much as pens:
A. pencils are weighted as twice as important in the economy compared to pens.
B. pens are weighted as twice as important in the economy compared to pencils.
C. pencils are weighted as equally important in the economy as pens.
D. nothing can be said about the relative importance of pens and pencils in the economy.
Each good is weighted by its market price.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #36
Difficulty: Easy
Learning Objective: 8-2
Topic: Measuring GDP
21. Double counting in the national income accounts will occur if GDP is computed by summing
up:
A. final output sales.
B. value added.
C. all sales.
D. the income earned by a country's residents.
Including the value of intermediate goods (i.e. goods used to produce other goods) in GDP leads
to double counting since the value of these goods is also reflected in the value of the final goods
and services that they are used to produce.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #47
Difficulty: Medium
Learning Objective: 8-2
Topic: Measuring GDP
22. In 2008, the value of the stocks listed on the New York Stock Exchange decreased
tremendously. As a direct result:
A. both U.S. GDP and U.S. GNP declined by the same amount.
B. U.S. GDP declined by the amount of the stock market decline but U.S. GNP was unaffected.
C. U.S. GNP declined by the amount of the stock market decline but U.S. GDP was unaffected.
D. neither U.S. GDP nor U.S. GNP were affected.
Both GNP and GDP measure the value of goods and services produced by an economy, not the
change in the value of financial assets.
AACSB: Reflective Thinking
BLOOMS TAXONOMY: Application
Colander - Chapter 08 #50
Difficulty: Easy
Learning Objective: 8-2
Topic: Contrasting GNP and GDP
23. Aggregate income is a measure of:
A. household and business earnings from the sale of productive resources.
B. the market value of total output.
C. income households have available to spend before paying personal taxes.
D. income households have available to spend after paying personal taxes.
Aggregate income (National Income) equals the total income earned by citizens and businesses
in a country.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 08 #62
Difficulty: Medium
Learning Objective: 8-4
Topic: Measuring Aggregate Income
24. If U.S. imports of goods and services exceed exports U.S.:
A. GDP is less than the sum of consumption, investment, and government purchases.
B. GDP exceeds the sum of consumption, investment, and government purchases.
C. net exports are positive.
D. GDP equals the sum of consumption, investment and government purchases.
Net exports, or the difference between exports and imports, are added to the sum of
consumption, investment, and government purchases when computing total expenditure or GDP.
If net exports are negative, then U.S. GDP must be less than the sum of consumption,
investment, and government purchases.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #70
Difficulty: Medium
Learning Objective: 8-1
Topic: Components of GDP
25. In what category is the purchase of a computer by a business in national income accounting?
A. It is ignored because computers are considered intermediate goods--an input in the production
of other goods and services.
B. It is considered consumption.
C. It is a form of investment spending.
D. It is a form of savings.
Computers are a form of capital; increasing capital is investment.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #85
Difficulty: Medium
Learning Objective: 8-1
Topic: Components of GDP
26. Personal consumption expenditures consist of:
A. household and individual purchases of services and durable and nondurable goods.
B. foreign investments in the United States.
C. foreign plus domestic investments.
D. domestic investments.
See the definition of personal consumption expenditures in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 08 #87
Difficulty: Easy
Learning Objective: 8-1
Topic: Components of GDP
27. Investment includes:
A. an increase in corporate stock volumes during the year.
B. the purchase of medical supplies by the National Guard.
C. an increase in government purchases.
D. an increase in business inventories.
Changes in business inventories are part of gross private domestic investment.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #91
Difficulty: Easy
Learning Objective: 8-1
Topic: Components of GDP
28. The largest component of aggregate income is:
A. interest.
B. rents.
C. employee compensation.
D. profits.
See the table of the components of aggregate income, "Aggregate Income Breakdown for
Selected Countries."
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 08 #103
Difficulty: Easy
Learning Objective: 8-4
Topic: Measuring Aggregate Income
29. Use the following table to calculate net domestic product. NDP equals:
A. $120 billion
B. $135 billion
C. $150 billion
D. $155 billion
Net domestic product = consumption + investment + government purchases + net exports depreciation.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 08 #117
Difficulty: Medium
Learning Objective: 8-3
Topic: Depreciation
30. Real GDP can be used to accurately measure:
A. economic welfare over time.
B. the size of an economy's underground economy.
C. the change in market production over time.
D. the change in market prices over time.
Real GDP measures market activity, not human happiness, so it is not a good measure of
welfare. It also excludes price changes and the underground economy.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 08 #144
Difficulty: Easy
Learning Objective: 8-7
Topic: Uses and Limitations of GDP
31. If real GDP has increased by 3% and nominal GDP has increased by 5%, then:
A. depreciation is 2%.
B. net factor income is 2%.
C. inflation is 2%.
D. net exports are 2%.
Percentage change in real GDP = percentage change in nominal GDP minus the rate of inflation.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 08 #153
Difficulty: Easy
Learning Objective: 8-7
Topic: GDP and the Price Level
32. Modern macroeconomics developed as an attempt to explain:
A. long-run growth.
B. persistent inflation.
C. balance of trade problems.
D. short-run business cycles.
The emphasis in early macroeconomics was short-run deviations from full-employment output.
Inflation was hardly mentioned.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 09 #14
Difficulty: Easy
Learning Objective: 9-1
Topic: Growth Models
33. The Rule of 72 implies that a country with a growth rate of 8 percent will double its income
in about:
A. 4 years.
B. 6 years.
C. 9 years.
D. 12 years.
The Rule of 72 says that a country's income will double in the number of years equal to 72
divided by the country's growth rate (9 in this case.)
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 09 #27
Difficulty: Medium
Learning Objective: 9-1
Topic: Compounding
34. If a country's population is 10 million and its GDP is $113 billion, its per capita output is:
A. $113.
B. $1,130.
C. $11,300.
D. $113,000.
Per capita output is obtained by dividing GDP by the population.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 09 #42
Difficulty: Easy
Learning Objective: 9-1
Topic: Per Capita Output
35. If output increases by 5 percent and population growth is 3 percent, per capita output:
A. grows by 2 percent.
B. grows by 3 percent.
C. grows by 5 percent.
D. grows by 8 percent.
Growth in per capita output equals the difference between the growth rate of output and the
growth rate of population.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 09 #45
Difficulty: Medium
Learning Objective: 9-1
Topic: Per Capita Output
36. In the early 2000s, analysts feared that low academic achievement in math in the United
States may reduce U.S. economic growth by as much as half a percentage point a year. In terms
of factors leading to growth, the low math scores indicate that the U.S. may be at a disadvantage
in terms of:
A. social capital.
B. human capital.
C. growth-compatible institutions.
D. technology.
Human capital is acquired skill that makes people more productive.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 09 #62
Difficulty: Easy
Learning Objective: 9-2
Topic: Sources of Growth
37. A resource the United States lacked in the 20th century and had to import was:
A. minerals.
B. land.
C. labor.
D. technological creativity.
In the 20th century, the United States imported people, a resource it lacked, through liberal
immigration laws.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 09 #75
Difficulty: Medium
Learning Objective: 9-2
Topic: Sources of Growth
38. One reason why the Soviet Union grew slowly in the 20th century compared to the U.S. and
Western Europe was that it:
A. did not invest as much in capital goods.
B. invested in too many consumer goods.
C. licensed too many private enterprises, creating destructive competition.
D. did not provide incentives for individuals to produce what consumers valued.
The Soviet Union did invest in capital goods (at the expense of consumer goods) but still did not
grow. It lacked institutions with incentives for individuals to work hard.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 09 #76
Difficulty: Medium
Learning Objective: 9-2
Topic: Sources of Growth
39. Which of the following is an example of human capital?
A. Robots used to manufacture cars.
B. Well-developed financial markets.
C. On-the-job training.
D. Trust among firms that allows short-term credit.
Human capital is people's knowledge. Robots are physical capital while financial markets and
trust are social capital.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 09 #79
Difficulty: Easy
Learning Objective: 9-2
Topic: Sources of Growth
40. According to estimates in the text, which of the following factors made the most important
contribution to U.S. growth between 1928 and today?
A. Technology.
B. Human capital.
C. Physical capital.
D. Labor.
At 35 percent, technology contributed more to growth than any other factor.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 09 #84
Difficulty: Easy
Learning Objective: 9-2
Topic: Sources of Growth
41. The law of diminishing marginal productivity implies that increasing only one input will:
A. not increase output.
B. lead to smaller and smaller increases in output.
C. lead to identical increases in output.
D. lead to larger and larger increases in output.
See the definition of the law of diminishing marginal productivity in the textbook.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 09 #99
Difficulty: Easy
Learning Objective: 9-3
Topic: Production Functions
42. According to the Classical growth model, an economy that increases its saving will grow:
A. slower because consumption and aggregate demand will be reduced.
B. slower because interest rates will fall, causing investment to decline.
C. faster since the increase in saving will permit greater investment.
D. faster since the increase in saving will permit more rapid technological progress.
Greater saving permits higher level of investment and capital accumulation, which in turn
stimulate growth.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 09 #106
Difficulty: Medium
Learning Objective: 9-5
Topic: Growth Models
Colander - Chapter 09
43. Refer to the graph above. Which of the production functions reflects the law of diminishing
marginal productivity?
A. A.
B. B.
C. C.
D. None of the production functions do since all inputs are being varied.
Only with C do increases in labor lead to successively smaller increases in output.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 09 #112
Difficulty: Medium
Learning Objective: 9-5
Topic: Production Functions
44. Convergence in growth rates across countries is most likely to arise in the presence of:
A. factor immobility.
B. differences in institutional structures.
C. incomparable factors of production.
D. differences in the marginal product of capital.
Differences in the marginal product of capital produce differences in production costs that
enhance growth rates in developing countries with higher marginal productivities of capital and
depress growth rates in developed countries with lower marginal productivities. The result is a
tendency for per capita income levels to converge across rich and poor countries.
AACSB: Analytic
BLOOMS TAXONOMY: Knowledge
Colander - Chapter 09 #127
Difficulty: Easy
Learning Objective: 9-4
Topic: Convergence Hypothesis
45. If the positive externalities associated with learning by doing are sufficiently great,
production will be characterized by:
A. decreasing returns to scale.
B. constant returns to scale.
C. increasing returns to scale.
D. diminishing marginal productivity.
Since learning by doing implies that efficiency increases with the level of output, a doubling of
inputs is likely to more than double output.
AACSB: Analytic
BLOOMS TAXONOMY: Comprehension
Colander - Chapter 09 #155
Difficulty: Medium
Learning Objective: 9-5
Topic: Growth Models
46. Network externalities:
A. can explain why more efficient technologies displace less efficient technologies.
B. can explain why the economy fails to adopt the most efficient technologies.
C. reduce the cost of switching to new technologies.
D. can explain why technological lock-in no longer occurs.
Network externalities increase the value of a technology as the number of users of that
technology increases. This can block the use of more efficient technologies because it increases
the cost of switching to these technologies.
AACSB: Analytic
BLOOMS TAXONOMY: Application
Colander - Chapter 09 #163
Difficulty: Medium
Learning Objective: 9-5
Topic: Growth Models