Chapter 17 - In Search of Prosperity and Stability
Part I: Multiple Choice
Answer: b
1. In macroeconomics, variables that have been adjusted for the
effects of inflation are called _________.
a) Absolute variables
b) Real variables
c) Nominal variables
d) Normal variables
Answer: a
2. Which of the following is a measurement of improvements in
technology and organization that allow more output per unit of
labor and capital inputs?
a) Total factor productivity
b) Real labor productivity
c) Nominal capital productivity
d) Real input productivity
Answer: c
3. The point on the business cycle where real GDP reaches its
highest level is known as the ________.
a) Summit
b) Appogee
c) Peak
d) Maximoid
Answer: d
4. If real GDP is above its natural rate, we say that there is which
of the following?
a) A contraction
b) A cyclical trough
c) A negative output gap
d) A positive output gap
Answer: d
5. The part of the business cycle starting with a peak and ending
with the next trough is known as a(n) ______.
a) Expansion
b) Rebound
c) Declination
d) Contraction
Answer: c
6. Which of the following people would be counted as
unemployed?
a) A person who works 10 hours each week for pay but would
like to work full time.
b) A person who is not working but seeking employment.
c) A person who was absent from a job because of bad
weather
d) All of the above are counted as unemployed.
Answer: a
7. Since 1960, which of the following is true of the
unemployment rate in the United States?
a) Usually stayed between 4 and 10 percent
b) Never fallen below 6 percent
c) Never risen above 6 percent
d) Usually stayed between zero and 4 percent
Answer: d
8. People who are not working and not seeking employment are
counted in
a) the number of unemployed.
b) the labor force.
c) the unemployment rate.
d) None of the above
Answer: d
9. People who are willing to work in principle, but who do not
look for work because they think no work is available are
a) called discouraged workers.
b) not included in the labor force.
c) counted as unemployed.
d) Both a) and b), but not c)
Answer: c
Table 17.1: Population and Unemployment Data (in thousands)
Number of employed
Number of unemployed
Population (noninstitutional adult)
138
9
200
10. Table 17.1 reports population and employment statistics for a
recent year. According to the table, how many people are in
the labor force?
a) 129 thousand
b) 138 thousand
c) 147 thousand
d) 191 thousand
Answer: c
11. Table 17.1 reports population and employment statistics for a
recent year. According to the table, the unemployment rate is
closest to which of the following?
a) 3.1%
b) 4.5%
c) 6.1%
d) 6.5%
Answer: b
12. What is the portion of unemployed that is accounted for by
people who are out of work for long periods of time because
their skills do not match those required for available jobs
known as?
a) Frictional unemployment
b) Structural unemployment
c) Cyclical unemployment
d) Functional unemployment
Answer: a
13. What is the rate of unemployment that prevails when the
output gap is zero called?
a) The natural level of unemployment
b) Structural unemployment
c) Cyclical unemployment
d) Countercyclical unemployment
Answer: a
14. What dos inflation mean?
a) A sustained increase in the average level of prices of all
goods and services
b) A period of expanding real output
c) A period when the average level of prices is above
average and unlikely to fall from that high level
d) Rapid growth of real GDP
Answer: c
15. What is the term for the process of adjusting payments like
social security benefits for changes in the price level?
a) Cyclical alignment
b) Nominal adjustment
c) Indexation
d) Realization
Answer: b
16. If the rate of inflation is 8 percent and the interest rate
expressed in the ordinary way, in current dollars, is 11
percent, what is the real interest rate?
a) -3 percent
b) 3 percent
c) 19 percent
d) Approximately 72 percent
Answer: c
17. The nominal rate of interest tends to adjust to inflation in order
to keep the real rate constant when the rate of inflation is
accurately expected by whom?
a) Creditors
b) Debtors
c) Both a) and b)
d) Neither a) nor b)
Answer: c
18. Expected inflation tends to
a) hurt creditors and helps debtors.
b) hurt debtors and helps creditors.
c) lead to an increase in the nominal interest rate.
d) Both b) and c)
Answer: d
19. If the average level of prices decreases at a steady rate of 5
percent for 12 consecutive months, we would say that the
country is experiencing which of the following?
a) Expansion
b) Counteraction
c) Declination
d) Deflation
Answer: c
20. Based on the experience of many countries over a long
period of time, it appears that periods of rapid inflation are
accompanied by which of the following?
a) Rapid productivity growth
b) Low nominal interest rates
c) Slow or negative growth of real GDP
d) Unusually low unemployment
Answer: c
21. Taking the various effects of price increases and decreases
into account, policy makers in most countries aim for which of
the following?
a) Steady, rapid inflation
b) Steady but moderate deflation
c) A low but positive rate of inflation
d) A steadily rising rate of inflation
Figure 17.1
Wildnerness Areas
Answer: d
B
A
C
Real Output
22. Figure 17.1 shows a production possibility frontier with a
tradeoff between economic growth and greater preservation of
wilderness areas. Based on the figure, which of the following
is true?
a) The economy experiences positive economic growth and
more wilderness areas when it moves to point B from C.
b) The economy enjoys positive economic growth and more
wilderness areas when it moves to point A from point B.
c) The economy has positive economic growth but less
wilderness areas when it moves to point B from point A.
d) The economy has negative economic growth and more
wilderness areas when it moves to point B from point C.
Answer: b
Figure 17.2
Real Output
D
B
C
A
Time
23. Figure 17.2 shows a hypothetical business cycle. According
to the diagram, a movement between which of the following
two points is called a contraction?
a) A to B
b) B to C
c) C to D
d) A to D
Answer: c
24. Figure 17.2 shows a hypothetical business cycle. According
to the diagram, what is a point like C called?
a) The peak of the cycle
b) The contraction
c) The trough of the cycle
d) The expansion
Answer: b
25. Looking at both emerging and developing countries around
the world, which of the following is true of inflation?
a) It has been replaced by general deflation.
b) It has slowed in most countries since the 1970s.
c) It has increased in most countries since the 1970s.
d) It has become more variable from year to year in all
countries since the 1970s.
Chapter 18 - The Circular Flow of Income and Expenditure
Part I: Multiple Choice
Answer: b
1. The sum of income received by all households as wages,
salaries, interest and other forms of income is called _____.
a) Gross household receipts
b) Gross domestic income.
c) Household domestic receipts.
d) Gross household injections.
Answer: d
2. Which of the following is always equal to gross domestic
income in the circular flow of income and expenditure?
a) Gross leakages
b) Net tax revenues plus transfers
c) Net exports
d) Gross domestic income
Answer: c
3. Which of the following is an example of a leakage?
a) Government purchases.
b) Exports.
c) Net taxes
d) Consumption
Answer: a
4. Which of the following is an example of an injection?
a) Exports
b) Imports
c) Saving
d) Net taxes
Answer: a
5. When the circular flow is in equilibrium,
a) Exports.
b) Net taxes.
c) Household saving.
d) Government borrowing.
Answer: b
6. In the circular flow, household savings are shown as a flow
into which sector of the economy?
a) Factor markets
b) Financial markets
c) Product markets
d) Foreign markets
Answer: b
7. In an open economy, if exports exceed imports, which of the
following must also be true?
a) There must be a government budget deficit.
b) There must be a financial outflow.
c) There must be a financial inflow.
d) Both a) and b), but not c)
Answer: a
8. In the circular flow of an open economy, if saving is equal to
investment and there is a net financial inflow, then which of
the following must also be true?
a) There must be a government budget deficit.
b) Imports must exceed exports.
c) Total leakages must exceed total injections.
d) Government expenditures must exceed transfer payments.
Answer: b
9. If a certain economy has exports that exceed imports and a
government budget surplus, then which of the following must
be true?
a) Transfer payments must exceed gross wages.
b) Saving must exceed investment.
c) Investment must exceed saving.
d) There must be negative net inventory change.
Answer: d
10. What do we mean when we say a country is experiencing
“twin deficits?
a) Exports exceed imports.
b) Imports exceed exports.
c) Government purchases exceed net taxes.
d) Both b) and c)
Answer: b
11. Which of the following relationships is always true in a closed
economy?
a) Consumption = investment
b) Investment + Government purchases = Savings + net
taxes
c) Consumption + Savings = Gross domestic Income
d) All of the above
Answer: b
12. Which of the following equation properly represents the
relationships among the components of GDP?
a) Q = C + I + (G-T) + (Ex-Im)
b) Q = C + I + G + (Ex-Im)
c) Q = C + I + G + (Im-Ex)
d) Q = C + S + T + (Ex-Im)
Answer: a
13. If firms produce goods that they expect to sell but fail to sell
them because consumption is less than expected, there will
be
a) positive unplanned inventory investment.
b) negative planned inventory investment.
c) negative total investment.
d) positive planned non-inventory investment.
Answer: b
14. When the Cincinnati Reds unexpectedly reach the World
Series, Jan’s T-shirt Company receives a large unexpected
order. To fill it, Jan has to buy a new printing machine. This
expenditure is an example of which of the following?
a) Unplanned fixed investment
b) Planned expenditure
c) Unplanned inventory investment
d) Net business saving
Answer: b
15. Which of the following economists was known for a
“psychological law” relating consumer expenditure to income?
a) Adam Smith
b) John Maynard Keynes
c) John Stuart Mill
d) David Ricardo
Answer: d
16. Which of the following is an example of a transfer payment?
a) Government purchases
b) Income taxes
c) Property taxes
d) Social Security benefits
Answer: b
17. The marginal propensity to consume normally has a value of
a) Less than 1
b) Between 0 and 1
c) Equal to 1
d) Greater than 1
Answer: a
18. If consumers earned income is unchanged but part of their
purchasing power is taken away by a tax increase, we would
say there is ________.
a) an increase in disposable income.
b) unplanned disposable investment.
c) a decrease in disposable income.
d) an increase in net leakages.
Answer: d
19. A change in which of the following can affect the level of
consumption spending?
a) Total household income
b) Consumer wealth, for example, through an increase in the
value of homes
c) A change in interest rates that makes consumer borrowing
less expensive
d) All of the above
Answer: d
20. Which of the following has the strongest and most direct
influence over the level of investment spending?
a) Net exports
b) Consumer confidence
c) The government budget deficit
d) Interest rates
Answer: b
21. Which of the following is considered to be an example of an
exogenous element of the circular flow?
a) Planned investment
b) Government purchases
c) Saving
d) Imports
Answer: c
22. Which of the following must be equal to zero when the
circular flow is in equilibrium?
a) The trade deficit
b) The government budget deficit
c) Unplanned inventory investment
d) Financial inflows
Answer: c
23. Suppose that beginning from a state of equilibrium, there is
an increase in planned investment expenditure because of an
increase in consumer confidence. Which of the following will
be expected to happen as a result?
a) An increase in gross domestic product
b) An increase in gross domestic income
c) An increase in financial outflows
d) a) and b), but not c)
Answer: a
24. The tendency of a given change in exogenous planned
expenditure to cause a greater change in equilibrium GDP is
known as ________.
a) the multiplier effect
b) the Keynes effect
c) the unplanned investment effect
d) the twin deficit effect
25. Suppose that beginning from a state of equilibrium, there is
an exogenous $1 billion increase in exports. Which of the
following would be expected as a result?
a) A decrease in equilibrium GDP
b) No change in equilibrium GDP
c) An increase of less than $1 billion in equilibrium GDP
d) An increase of more than $1 billion in equilibrium GDP
Answer: d
Chapter 19 - Measuring Economic Activity
Part I: Multiple Choice
Answer: b
1. Final goods and services are all those
a) used in the production of another good or service.
b) ready for sale to parties that will use them for consumption,
investment, government purchases, or export.
c) that have value added in production.
d) All of the above
Answer: a
2.
a)
b)
c)
Counting both final and intermediate goods in GDP would
overstate production.
understate production.
give the same result as the sum of value added of each good
and service.
d) provide the appropriate value of all final goods and services
produced in the economy.
Answer: b
Table 19.1
Value of final product (one pen)
Cost
$1.00
Expenses
Raw materials
Wages paid
Energy
$0.10
$0.70
$0.15
3. Table 19.1 shows the various intermediate goods and services
that go into the manufacture of a pen. Based on the table,
what is the value added in the production of one pen?
a) $0.25
b) $0.75
c) $1.00
d) $1.70
Answer: b
4. Table 19.1 shows the various expenses in producing one pen.
Which of the following should not be included in value added
for producing one pen?
a) Wages paid
b) Energy
c) Profit (value minus total expenses)
d) None of the above should be included in value added
Answer: b
5. The expenditure approach to computing GDP involves
summing which of the following?
a) The values added of each intermediate good used in the
production of a final good
b) Consumption, investment, government purchases, and net
exports
c) Wages, salaries, interest income, rent, and profit
d) The value of intermediate plus final goods and services
Answer: a
6. Which of the following components of GDP is largest for the
US economy?
a) Consumption
b) Investment
c) Government purchases
d) Net exports
Answer: c
7.
a)
b)
c)
d)
Answer: a
8. The rental value of an owner-occupied house is included in
which component of GDP?
a) Consumption
b) Intermediate value
c) Fixed investment
d) None of the above
Answer: c
9. Suppose a Japanese automaker manufactures cars in the
United States. If these cars are sold to U.S. consumers, they
will be counted in _________.
a) Japan’s gross domestic product (GDP)
b) U.S. gross national product (GNP)
c) U.S. consumption
d) All of the above
Answer: d
10. Which of the following is included in the government
purchases component of GDP?
a) Pay of active-duty soldiers
b) Veterans benefits paid to disabled former soldiers
c) Unemployment benefits to civilian workers
d) Both a) and b), but not c)
Which of the following is a nondurable consumption good?
furniture
automobile
gasoline
appliances
Answer: d
11. Which of the following is included in the investment
component of GDP?
a) Construction of a new commercial warehouse
b) Purchases of initial inventory to stock the shelves of a newly
opened bookstore
c) Construction of a private residence
d) All of the above
Answer: a
12. The difference between gross and net national product is
equal to which of the following?
a) The allowance for the consumption of fixed capital
b) Unplanned inventory investment
c) Total inventory investment
d) Factor income earned from property located abroad
Answer: c
13. Which of the following is not included in national income?
a) Proprietors’ income
b) Net interest
c) Payments of factor income to the rest of the world
d) All of the above are included in national income
Answer: a
14. Which of the following provides the best measure of total
economic activity that takes place on the territory of a country?
a) Gross domestic product
b) Net national income
c) Net national product
d) Disposable national income
Answer: d
15. The current account section of a country’s international
accounts includes which of the following?
a) Exports of goods
b) Imports of services
c) Transfer payments from foreign sources
d) All of the above
Answer: a
16. A country’s merchandise balance includes which of the
following?
a) Imports of goods
b) Exports of services
c) Transfer payments
d) All of the above
Answer: b
17. An Indian IT specialist working in California sends part of her
pay home to her parents in India. That payment is included in
which section of the Indian international accounts?
a) The merchandise balance
b) The current account
c) Financial inflows
d) Financial outflows
Answer: c
18. A visiting professor from France teaches a short medieval
literature course at a US university. The salary paid by the US
university for the course appears as what type of entry in the
US international accounts?
a) A transfer payment
b) A financial outflow
c) An import of services
d) An import of merchandise
Answer: b
19. The section of a country’s international accounts that consists
of purchases and sales of assets in international borrowing and
lending is known as the _______.
a) Balance of trade
b) Financial account
c) Current account
d) Merchandise balance
Answer: a
20. A change in official foreign reserve assets held by the U.S.
government is included in which of the following sections of the
international accounts?
a) The financial account
b) The current account
c) The statistical discrepancy
d) None of the above
Answer: d
21. A price index based on a sample of goods and services
purchased by business firms is known as the _______.
a) Base year price index
b) Consumer Price Index (CPI)
c) GDP Deflator
d) Producer Price Index (PPI)
Answer: b
22. In 2003, nominal GDP was roughly $10,000 and the GDP
deflator was 110. According to this information, real GDP was
closest to which of the following
a) $9,890
b) $9,091
c) $11,000
d) $11,000,000
Answer: a
23. How often are GDP data published in the United States?
a) Annually
b) Quarterly
c) Monthly
d) Weekly
Answer: a
24. Because of biases in price indexes, it is widely believed that
inflation, as measured by the rate of change of the consumer
price index,
a) overstates the true rate of inflation.
b) understates the true rate of inflation.
c) Is a better measure of production costs than of the cost of
living.
d) should be corrected for the cost of imports.
Answer: d
25. Which of the following is a nonmaterial source of welfare
excluded from national income and product accounts?
a) Improvements in health of the population
b) Depletion of natural resources like forests and mines
c) Increases or decreases in the area of protected wilderness
d) None of the above is included in GDP