Macro I

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. The study of a single firm and how it determines prices would fall under:

A. macroeconomics. B. microeconomics.

C. economic growth. D. fiscal policy. E. the Federal Reserve.

____ 2. The primary emphasis in macroeconomics is on:

A. how firms set prices. B. the national economy. C. marginal analysis. D. bits and pieces of the economy. E. the employment of individual workers.

____ 3. A key theme fundamental to all of economics is: A. there are limited wants. B. we are a rich country but are simply not aware of it. C. people have unlimited wants and face limited means to satisfy them. D. there are unlimited resources. E. income is evenly distributed to all persons in the economy.

____ 4. A resource is anything that: A. can be used in production. B. you pay for. C. is in scarce supply. D. can be consumed. E. requires technology to harvest.

____ 5. We have to make choices because: A. we have unlimited income. B. resources are scarce. C. choices involve a trade-off. D. resources are scarce and because choices involve a trade-off.

E. marginal benefits never exceed marginal costs.

____ 6. Economists tend to believe that to change people's behavior you must: A. appeal to their concern for society. B. change their incentives.

C. legislate the change. D. appeal to their religious values. E. encourage them to vote.

____ 7. When a local factory closes, why does it spell bad news for the local restaurants? A. Sales taxes are likely to increase.

B. Unemployed factory workers have lower incomes and are less likely to dine out. C. Unemployed factory workers are eligible for government unemployment benefits. D. The opportunity cost of dining out has fallen.

E. Prices of raw materials like meat and vegetables are likely to fall.

____ 8. Suppose people in households decide to spend less. How will this impact an economy? A. It will have no impact since this group makes up a small portion of any economy. B. It will decrease the level of income of other people since household spending becomes

someone else's income. C. It will cause prices for many goods to increase. D. It will increase the level of income in the economy since other groups will spend more. E. It will lead to higher levels of production for most goods and services.

____ 9. A simplified representation that is used to study a real situation is called: A. a model. B. normative analysis. C. an assumption. D. a trade-off. E. a hypothesis.

____ 10. Economic models are: A. created and used in order to duplicate reality. B. useless if they are simple. C. made generally of wood, plastic, and/or metal.

D. often useful in forming economic policy. E. rarely testable using the scientific method.

____ 11. In a typical business cycle, the business cycle trough is immediately followed by the: A. business cycle peak.

B. recession. C. depression. D. expansion. E. downturn.

____ 12. The point at which a recession ends and the expansion begins is called the:

A. business cycle trough. B. downturn. C. business cycle peak. D. lag. E. contraction.

Figure 2-1: The Business Cycle

____ 13. Use “The Business Cycle” Figure 2-1. Point B on this graph shows

A. a peak.

B. a recovery C. an expansion. D. a recession. E. a trough.

____ 14. Inflation adversely affects some people because: A. nominal income falls during inflation. B. purchasing power tends to increase during inflation. C. budget deficits increase during inflation. D. inflation causes money to lose its value over time. E. real wages rise during inflation.

____ 15. When economists measure economic growth, they often use: A. the inflation rate. B. the unemployment rate. C. nominal gross domestic product. D. real gross domestic product. E. the trade deficit.

____ 16. An economy is efficient if it is: A. possible to produce more of all goods and services. B. possible to produce more of one good without producing less of another. C. not possible to produce more of one good without producing less of another good. D. providing each person with an equal quantity of goods and services. E. entirely run by the government.

____ 17. Economists define an efficient use of resources as a situation where: A. all persons are guaranteed a fair share of the economic resources. B. all persons can be made better off, without making anyone worse off. C. all persons receive an equal share of the resources.

D. all persons are made worse off when one person is made better off. E. one person can be made better off, but only by making another person worse off.

____ 18. In most cases, economic efficiency is achieved through: A. individuals that sacrifice their own self-interest.

B. regulation of the invisible hand. C. individuals seeking out opportunities that involve no risk. D. maximizing equity. E. incentives built into a market economy.

Production

alternatives

V W X Y Z

Capital goods

per period

0 1 2 3 4

Consumer

goods per

period

20 18 14 8 0

Table 3-2: Production Possibilities Schedule II

____ 19. Based on Table 3-2, iIf the economy is producing at alternative X, the opportunity cost of producing at Y

instead of X is ________ units of consumer goods per period.

A. 0 B. 11 C. 8 D. 14 E. 6

Figure 3-2: Strawberries and Submarines

____ 20. Use the “Strawberries and Submarines” Figure 3-2. Suppose the economy is operating at point G. This

implies that:

A. the economy can move to a point such as C only if it improves its technology. B. the economy is experiencing unemployment and/or an inefficient allocation of resources. C. the economy lacks the resources to achieve a combination such as C. D. people in this economy don't really like strawberries and submarines. E. the economy can move to point B, but must sacrifice submarine production to do so.

Alternatives A B C D E F

Consumer

goods per

period

0 1 2 3 4 5

Capital goods

per period

30 28 24 18 10 0

Table 3-4: Production Possibilities Schedule

____ 21. Use Table 3-4. If the economy produces 4 units of consumer goods per period, it also can produce at most

________ units of capital goods per period. A. 30 B. 28 C. 10 D. 18 E. 0

____ 22. Use Table 3-4. If the economy produces 24 units of capital goods per period, it also can produce at most ________ units of consumer goods per period. A. 5 B. 4 C. 3 D. 2 E. 1

____ 23. The simplest circular-flow model shows the interaction between households and firms. In this model: A. only barter transactions take place. B. households and firms interact in the market for goods and services, but firms are the only

participants in the factor markets. C. firms supply goods and services to households, which, in turn, supply factors of

production to firms. D. attention is focused on “real” flows of goods, services, and factors of production, but

money flows between households and firms are ignored for simplicity. E. firms supply factors of production to households, which, in turn, supply goods and

services to the firms.

____ 24. The circular-flow diagram illustrates how households ________ goods and services and ________ factors of production. A. buy; sell B. buy; buy C. own; buy D. own; sell E. sell; buy

____ 25. Total income households have after paying taxes and receiving government transfers is called: A. disposable income. B. private savings. C. aggregate spending. D. investment.

E. gross income.

Figure 10-1: Circular Flow Model

____ 26. Use the “Circular Flow Model” Figure 10-1. What is GDP in this economy?

A. $100 B. $400 C. $500 D. $600 E. $560

____ 27. 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 consumer spending? A. a reduction in investment spending equal to the increase in consumer spending B. a decrease in the nominal GDP C. an increase in the unemployment rate

D. a decrease in the inflation rate E. an increase in the nominal GDP

____ 28. 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 consumer 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 investment spending equal to the decrease in consumer spending.

____ 29. Use the “Circular Flow Model” Figure 10-1. What is disposable income in this economy? A. $0 B. $100 C. $400 D. $500 E. $300

____ 30. Use the “Circular Flow Model” Figure 10-1. In this economy, how does the government finance its purchases of goods and services?

A. by printing money B. by collecting taxes C. by borrowing D. By collecting taxes and borrowing E. by collecting taxes and selling assets.

Rent $2,400

Consumption Spending 7,900

Social Security Benefit 6,100

Investment Spending 2,100

Wages and Salaries 6,500

Exports 800

Interest 1,900

Government Purchases of goods and services

2,600

Profits 1,400

Imports 1,200

Purchase of stocks 6,300

Unemployment Compensation

3,950

Payroll Taxes 2,965

Sales Taxes 1,300

Table 10-1: Calculating GDP

____ 31. Use Table 10-1. Using the information in the table provided, which of the following is the correct calculation for GDP in 2008? A. $47,475 B. $12,200 C. $21,485 D. $34,085 E. $12,600

____ 32. Goods that are produced in a particular period but NOT sold in that period: A. go into inventories and are called consumption. B. end up in inventories and are included in investment. C. are finally included in depreciation when they are sold. D. are classified as intermediate goods. E. are not counted in GDP because they were not sold.

____ 33. Real GDP is nominal GDP adjusted for: A. double counting. B. changes in prices. C. population. D. imports.

E. interest rates.

____ 34. Consider an economy that only produces two goods: DVDs and DVD players. Last year, 10 DVDs were sold at $20 each and 5 DVD players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Nominal GDP this year is: A. $100.

B. $650. C. $700. D. $500 E. $1,350

____ 35. Consider an economy that only produces two goods: DVDs and DVD players. Last year, 10 DVDs were sold at $20 each and 5 DVD players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Real GDP this year using last year as the base year is: A. $100. B. $700.

C. $1,300. D. $300 E. $650

Product 2008 Output 2008 Prices

(base year)

Product 2009 Output 2009 Prices

Peanut Butter 200 units $1 per unit Peanut Butter 250 $1.10

Jelly 100 units $2 per unit Jelly 100 $2.50

Table 11-1: Peanut Butter and Jelly Economy

____ 36. Use Table 11-1. A simple economy produces only peanut butter and jelly. Using the data in the attached table,

nominal GDP in 2009 was ____ and real GDP in 2009 was _____.

A. $450; $400 B. $525; $450 C. $525; $400 D. $450; $575 E. $500; $450

____ 37. Use Table 11-1. A simple economy produces only peanut butter and jelly. Using the data in the attached table, from 2008 to 2009 real GDP ____ by _____%. A. increased; 12.5 B. decreased; 50 C. increased; 43.75 D. decreased; 12.5 E. increased; 50

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

____ 38. Use Table 11-2. The value of Year 4's output in nominal dollars is:

A. $6. B. $24.

C. $30. D. $36. E. $12.

____ 39. 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.

____ 40. Use Table 11-2. The value of Year 3's output in real dollars is: A. $5. B. $20. C. $27. D. $36. E. $9.

Gino’s pizza Bruno’s

spaghetti

Carlo’s cookies Aldo’s salad

2008 units of

output

4,000 3,000 2,000 5,000

2008 price per

unit

$10 $9 $6 $7

2009 units of

output

4,000 1,000 1,000 2,000

2009 price per

unit

$8 $6 $1 $4

Table 11-4: Pizza Economy III

____ 41. 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

____ 42. Employment in the labor force is defined as: A. the total labor force. B. the total population of working age. C. the total number of persons actively working. D. the total number of persons not unemployed. E. the total population of working minus the number of persons unemployed.

____ 43. The labor force is defined as: A. the total persons employed. B. the total population. C. the total of the population of working age. D. the total of the persons employed and unemployed. E. the total of the population of working age minus those voluntarily not seeking to work.

____ 44. 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.

____ 45. To be counted as unemployed, one must: A. have had a job previously. B. be out of work and be actively looking for a job. C. have had a job before and be actively looking for work. D. actively looking for a job and have at least a high-school degree or its equivalent E. be out of work and not a full-time student.

____ 46. If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its labor force is: A. 335 million. B. 200 million. C. 155 million. D. 150 million.

E. 135 million.

____ 47. If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then its labor force is:

A. 150 million. B. 145 million. C. 140 million. D. 135 million. E. 200 million

____ 48. If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then its number of discouraged workers is: A. 25 million. B. 15 million. C. 10 million. D. 5 million. E. 20 million

____ 49. A survey reveals that on a small island 40 adults have jobs, 10 other adults are looking for jobs, and 30 are neither working nor looking for work. The unemployment rate on the island is: A. 12.5%. B. 20.0%. C. 25.0%.

D. 50.0%. E. 75.0%.

____ 50. Which one of the following is correct? A.

B.

C.

D.

E.

Full-time employed 20 million

Not working but looking for work

2 million

Part-time employed 10 million

Discouraged workers 1 million

Table 12-2: Employment

____ 51. Use Table 12-2. The labor force is:

A. 33 million. B. 32 million. C. 31 million. D. 22 million. E. 30 million.

____ 52. Discouraged workers are those individuals: A. who are getting paid too little. B. who do not like their jobs. C. who are working part time but are looking for a full-time job.

D. who have given up looking for a job. E. who are employed but extremely dissatisfied with their jobs.

____ 53. Anna recently moved to Boston in order for her husband Joe to begin a new job as an economics professor at Harvard. Anna is an experienced surgeon who is currently interviewing with several different hospitals in

Boston. Anna is currently: A. seasonally unemployed. B. structurally unemployed. C. cyclically unemployed. D. counted as employed since she is likely to receive a job offer soon. E. frictionally unemployed.

____ 54. Unemployment that is due to the time workers spend in job search is considered: A. operational unemployment. B. structural unemployment. C. cyclical unemployment. D. natural unemployment. E. frictional unemployment.

____ 55. 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.

____ 56. Unemployment that occurs because it takes workers and employees time to find each other is called: A. cyclical unemployment

B. structural unemployment C. frictional unemployment D. discouraged unemployment E. natural unemployment

____ 57. If a worker becomes unemployed due to an increase in the minimum wage, that worker is: A. frictionally unemployed. B. structurally unemployed. C. cyclically unemployed. D. engaged in job search. E. minimally unemployed.

____ 58. If the actual unemployment rate is 7% and the cyclical unemployment rate is 2%, then the natural rate of unemployment is: A. 2%. B. 5%. C. 7%. D. 9%. E. 3.5%

____ 59. If the actual unemployment rate is 7% and the natural rate of unemployment is 5%, then the cyclical unemployment rate is: A. 2%. B. 5%. C. 7%.

D. 9%. E. 12%

Figure 13-2: Effect of Minimum Wage

____ 60. 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.

____ 61. When the demand for labor is falling and employers have committed to high wages, ______ unemployment will result. A. frictional B. cyclical C. permanent

D. structural E. natural

____ 62. Efficiency wages are: A. market equilibrium wages. B. set above equilibrium wages to act as an incentive for better performance.

C. set below the equilibrium wage to increase firm profits. D. set by the government to reduce poverty. E. required by union contracts and encourage firms to hire more workers at this wage.

____ 63. The natural rate of employment is achieved when:

A. the actual rate of unemployment is equal to zero. B. the natural rate of unemployment is equal to the frictional rate of unemployment. C. the quantity of labor supplied is equal to the quantity of labor demanded. D. there is no cyclical unemployment. E. there is no cyclical unemployment and no frictional unemployment.

____ 64. The natural rate of unemployment would: A. increase if a larger percentage of the labor force were over 25 years old. B. increase if union membership fell. C. increase if unemployment benefits were increased. D. decrease if the average age of workers fell. E. decrease if the government removed successful job training programs.

____ 65. 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.

____ 66. 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.

____ 67. The natural level of unemployment contains no_________ unemployment. A. minority B. structural C. frictional

D. cyclical

E. actual

____ 68. Inflation is when there is: A. a rising aggregate price level. B. an expansion of output. C. a rise in wages. D. a rise in the unemployment rate. E. an increase in national income.

____ 69. Deflation is when there is: A. a decrease in unemployment. B. a decreasing aggregate price level. C. a decline in wages. D. a recession. E. a stock market crash.

____ 70. When inflation rises quickly: A. borrowers will be hurt and lenders will benefit. B. lenders will be hurt and borrowers will benefit. C. both borrowers and lenders will be hurt. D. both borrowers and lenders will benefit.

E. lenders will be hurt and those on fixed incomes will benefit.

____ 71. Increases in the average level of prices is called: A. depreciation. B. deflation.

C. inflation. D. expectations. E. speculation.

____ 72. Shoe-leather costs refer to the: A. effect of inflation on the prices of food, clothes, and other necessities.

B. increased cost of transactions due to inflation. C. high price of leather goods. D. effect of inflation on transportation costs. E. effect of inflation on clothing.

____ 73. Which of the following is a LIKELY response to inflation? A. People choose to carry higher money balances. B. People tend to make fewer transactions. C. People tend to make more transactions. D. People tend to hold on to fewer interest-bearing assets. E. People tend to keep more cash on hand.

____ 74. Deflation is a(n): A. decrease in the purchasing power of a unit of money. B. appreciation of the nation's currency. C. decrease in the average level of prices. D. increase in the average level of prices. E. problem only for developing nations.

____ 75. The ______ is the most widely used measure of inflation in the United States. A. producer price index

B. consumer price index C. GDP deflator D. national income account E. growth rate of real GDP

____ 76. If the cost of a market basket is $200 in Year 1 and $230 in Year 2, the price index for Year 2 with a Year 1 base is: A. 100. B. 90. C. 130.

D. 200. E. 115.

____ 77. If the cost of a market basket is $150 in Year 1 and $200 in Year 2, the price index for Year 1 with a Year 2 base is: A. 75.

B. 100. C. 133. D. 150. E. 95.

____ 78. Inflation can be measured by: A. the percentage change in the CPI. B. the absolute change in the CPI. C. the absolute change in the GDP deflator. D. the percentage change in nominal GDP. E. the percentage change in real GDP.

____ 79. If the CPI is 120 in Year 1 and 150 in Year 2, then the rate of inflation from Year 1 to Year 2 is _____. A. 10% B. 20% C. 25% D. 50% E. 100%

Year Consumer Price Index

1 80

2 (base year) 100

3 105

4 125

5 150

Table 15-1: The Consumer Price Index

____ 80. Use Table 15-1. The approximate rate of inflation in Year 3 is _____ percent.

A. 1 B. 10 C. 19 D. 20

E. 5

____ 81. Use Table 15-1. The approximate rate of inflation in Year 5 is _____ percent.

A. 5 B. 10 C. 19 D. 20 E. 150

____ 82. Use Table 15-1. The approximate rate of inflation in Year 2 is _____. A. 10% B. 19% C. 20%

D. 25% E. 100%

Year CPI

2007 125

2008 120

Table 15-3: CPI

II

____ 83. 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%.

____ 84. Which of the following statistics is used to measure changes in the prices that firms pay for goods and services? A. Producer Price Index B. Consumer Price Index

C. GDP Deflator D. Cost of Living Index E. Stock Market Index

____ 85. The marginal propensity to consume is:

A. increasing if the marginal propensity to save is increasing. B. the proportion of total disposable income that the average family consumes. C. the change in consumer spending divided by the change in aggregate disposable income. D. the change in consumer spending less the change in aggregate disposable income. E. equal to 1.

____ 86. The marginal propensity to consume is equal to: A. the proportion of consumer spending as a function of aggregate disposable income. B. the change in saving divided by the change in aggregate disposable income. C. one. D. the change in saving divided by the change in consumer spending. E. the change in consumer spending divided by the change in aggregate disposable income.

____ 87. The MPS plus the MPC must equal: A. zero. B. one. C. total income.

D. saving. E. disposable income.

____ 88. If the MPS = .1, then the value of the multiplier equals: A. 1. B. 5. C. 9. D. 10. E. 100.

____ 89. If the MPC is 0.8, then the multiplier is: A. 4. B. 5. C. 8. D. 10. E. 2.

____ 90. The marginal propensity to consume (MPC) is equal to the change in: A. aggregate demand divided by the change in consumer spending. B. consumer spending divided by the change in investment spending. C. consumer spending divided by the change in gross domestic product.

D. disposable income divided by the change in consumer spending. E. consumer spending divided by the change in disposable income.

____ 91. Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80. Assuming no taxes and no trade, by how much will real GDP change?

A. $500 billion decrease. B. $200 billion decrease. C. $800 billion decrease. D. $400 billion increase. E. $100 billion decrease.

____ 92. The MPC is the: A. change in saving divided by the change in disposable income. B. change in disposable income divided by the change in consumption. C. change in disposable income divided by the change in saving. D. change in consumption divided by the change in disposable income. E. change in consumption divided by the change in gross domestic product.