Mercer University
Fall 2013
Exam 2: Version 1: Answers
Refer to the following table for question below:
Table 1
Year
2000
2005
Nominal GDP
(billions)
600
1,000
GDP deflator
100.0
133.3
1) Refer to Table 1. Measured in terms of 2000 prices, real GDP in 2005 was
a. 600.
b. 750.
c. 900.
d. 1,333.
ANS: B
2) Jim, a U.S. citizen, gets a summer job working in Germany. His summer earnings
a. would count as part of U.S. GDP and German GNP.
b. would count as part of U.S. GNP and German GDP.
c. would count as part of U.S. GDP but would have no effect on Germany's GNP or GDP.
d. would be double-counted, raising both U.S. GDP and German GDP.
Answer: B
3) Crime currently affects the measurement of GDP such that
a. expenditures on police protection and detention centers contribute to GDP.
b. the loss to victims due to crime is subtracted from GDP.
c. crime is completely ignored because it does not express the economic well-being indicated
by GDP.
d. expenditures on police protection and detention centers are subtracted from GDP.
ANS: A
4) A business produced $10 million of goods in 2010 but sold only $9 million. Is the $1 million increase in
inventory counted as part of the 2010 gross domestic product?
a. No, because inventories are intermediate goods.
b. No, because if these inventories were sold in 2011, they would be counted twice.
c. Yes, because these inventories are part of the output of the economy in 2010.
d. Yes, but they will be added to the 2010 GDP only if they are sold in 2011.
ANS: C
5) Assume that between 1999 and 2009 nominal GDP increased from $7 trillion to $12 trillion and that the GDP
deflator rose from 100 to 150. Which of the following expresses GDP for 2009 in terms of 1999 prices?
a. $7.5 trillion
1
b. $8.0 trillion
c. $9.0 trillion
d. $18.0 trillion
ANS: B
Table 2
Employee compensation
Rents
Government consumption and gross investment
Depreciation
Gross private investment
Personal income taxes
Net exports
Personal consumption
Interest income
$800
90
50
200
400
140
50
640
100
6) Given the information in Table 2, the GDP equals
a. $1,140.
b. $1,330.
c. $1,650.
d. $2,670.
ANS: A
Table 3
Corporate profits
Interest income
Indirect business taxes
Depreciation
Employee compensation
Proprietors' income
Rents
Personal consumption
Government consumption and gross investment
Net exports
Income received by citizens for factors of production supplied abroad
Income paid to foreigners for their contribution to domestic output
$100
200
180
200
1,110
100
20
1,300
400
10
300
250
7) Refer to Table 3. Gross domestic product equals
a. $1,860.
b. $1,380.
c. $1,910.
d. $4,170.
ANS: A
8) Suppose that the consumer price index of a country was 160 at year-end 2007 and 168 at the end of 2008.
What was the country's inflation rate during 2008?
a. 5 percent
2
b. 8 percent
c. 60 percent
d. 68 percent
ANS: A
Table 4
Year
1920
1940
1960
1980
2000
Presidential salary
$75,000
75,000
100,000
200,000
400,000
CPI (2000 = 100)
11.6
8.1
17.2
47.9
100.0
9) Refer to Table 4. The salary of the president of the United States in 2000 was $400,000. In 1940, the
president's salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940
presidential salary measured in terms of the price of 2000 would be
a. less than $75,000.
b. less than $400,000.
c. approximately $668,850.
d. approximately $750,000.
e. approximately $926,000.
ANS: E
10) If the underground economy is large, then GDP will
a. understate the economy's performance.
b. overstate the economy's performance.
c. fluctuate unpredictably.
d. accurately reflect this subterranean activity.
ANS: A
11) Frictional unemployment is the result of
a. not enough jobs for everyone to be employed.
b. unemployed workers' skills not matching those needed for the available jobs.
c. a decline in the demand for labor, such as during a recession.
d. imperfect information and temporary periods of unemployment while workers are
changing jobs.
ANS: D
12) The recessionary phase of the business cycle is characterized by
a. decreasing real output and increasing unemployment.
b. decreasing real output and declining unemployment.
c. increasing real output and increasing unemployment.
d. increasing real output and declining unemployment.
ANS: A
13) The expansionary phase of the business cycle is characterized by
a. decreasing real output and increasing unemployment.
3
b. decreasing real output and declining unemployment.
c. increasing real output and increasing unemployment.
d. increasing real output and declining unemployment.
ANS: D
14) Tom loses his job and immediately begins looking for another. Other things the same, the unemployment rate
a. increases, and the labor-force participation rate decreases.
b. increases, and the labor-force participation rate is unaffected.
c. is unaffected, and the labor-force participation rate increases.
d. decreases, and the labor-force participation rate is unaffected.
ANS: B
15) Consider an economy made up of 100 people, 50 of whom hold jobs, 10 of whom are looking for work, and
15 of whom are retired. The unemployment rate is approximately
a. 10 percent.
b. 12 percent.
c. 17 percent.
d. 20 percent.
e. 25 percent.
ANS: C
16) The unemployment rate will increase whenever there is
a. an increase in the number of persons classified as unemployed.
b. an increase in the number of unemployed persons relative to the size of the labor force.
c. an increase in the size of the U.S. population and there is no change in the number of
persons classified as employed.
d. a reduction in the size of the labor force while the number of unemployed decreases.
ANS: B
17) Brian Vargo, an auto repair mechanic who remains unemployed because he refuses to work for less than
$1,000 an hour, is
a. counted as part of the labor force.
b. considered frictionally unemployed.
c. an underemployed worker.
d. not counted as part of the labor force.
e. considered as productively active.
ANS: D
18) The figures below (in millions) are for the United States during the year 2003.
Population (Age 16 and over)
Employed
Unemployed
221.2
137.7
8.8
The rate of labor force participation of the U.S. in 2003 was
a. 6 percent.
b. 62.3 percent.
c. 66.2 percent.
4
d. 137.7 percent.
ANS: C
19) If the official unemployment rate increases in March from its February level because of sluggish sales in the
auto industry, we can conclude that ____ unemployment is responsible for the increase.
a. seasonal
b. cyclical
c. structural
d. frictional
e. any one of the causes of
ANS: B
20) If Sam Jackson voluntarily quits one job, possesses marketable skills, and expects to find a new job in a few
weeks, then Mr. Jackson is considered
a. frictionally unemployed.
b. cyclically unemployed.
c. seasonally unemployed.
d. structurally unemployed.
e. unwise to quit his job without already having another one.
ANS: A
21) Jamal (now age 54) lost his job. He has very specialized skills that are no longer in demand. Jamal's
unemployment is best classified as
a. cyclical.
b. structural.
c. seasonal.
d. frictional.
e. voluntary.
ANS: B
22) When the rate of cyclical unemployment is zero, the
a. natural rate of unemployment must also be zero.
b. rate of frictional unemployment must be negative.
c. economy must have entered a recessionary stage.
d. economy is considered to be at full employment.
ANS: D
23) During a boom, the actual rate of unemployment will be
a. less than the natural rate of unemployment.
b. greater than the natural rate of unemployment.
c. equal to the natural rate of unemployment.
d. unaffected by the economic expansion.
ANS: A
24) The difference between actual real GDP and potential GDP
a. decreases as the unemployment rate rises.
b. increases as the unemployment rate rises.
c. increases as the employment rate rises.
5
d. decreases as the labor force increases.
ANS: B
25) If the price level in the current period is higher than what buyers and sellers anticipated,
a. profit margins will be unattractive and firms will expand output.
b. profit margins will be unattractive and firms will reduce output.
c. profit margins will be attractive and firms will expand output.
d. profit margins will be attractive and firms will reduce output.
ANS: C
26) As the general price level in an economy rises, the aggregate quantity demanded of goods and services falls
because
a. the prices of domestic goods have risen relative to foreign goods, causing exports to fall
and imports to rise.
b. higher interest rates caused by an increase in the demand for money balances causes a
reduction in current investment and consumption.
c. the value of money will fall, reducing the real wealth and, thus, the consumption of
persons holding money balances.
d. all of the above are correct.
ANS: D
27) Long-run equilibrium in the goods and services market requires that
a. aggregate supply equals aggregate demand and that decision makers correctly anticipate
the level of prices.
b. the unemployment rate is zero.
c. prices are neither increasing nor decreasing.
d. aggregate supply be larger than aggregate demand.
ANS: A
28) Which of the following best characterizes the circular flow of income?
a. Households buy goods and services from businesses, and businesses sell goods and
services to households.
b. The government purchases resources from businesses and households and then sells goods
and services to businesses and households.
c. Businesses buy resources from the government, and households buy goods and services
from businesses.
d. Businesses buy resources from households, and households use their income to buy goods
and services from businesses.
ANS: D
29) Other things the same, an increase in the price level induces people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate falls.
d. more money, so they lend less, and the interest rate rises.
ANS: D
30) Which of the following markets coordinates transactions with foreigners that involve the exchange of
currency?
a. the resource market
6
b. the stock market
c. the foreign exchange market
d. the loanable funds market
ANS: C
7