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Chapter 5 GDP: Measuring Total Production and Income
1) In calculating gross domestic product, the Bureau of Economic Analysis uses the sum of the
market value of final goods and services produced. This means that the BEA
A) simply counts the total number of goods produced in the market place and then adds them up.
B) values goods at their market prices, multiplies them by the quantity produced, and then adds
them up.
C) simply counts the total number of goods and services produced in the marketplace and then
adds them up.
D) values goods and services at their market prices, multiplies them by the quantity produced,
and then adds them up.
Answer: D
2) Suppose, in 2012, you purchased a house built in 2003. Which of the following would be
included in the gross domestic product for 2012?
A) the value of the house in 2012
B) the value of the house in 2003
C) the value of the house in 2012 minus depreciation
D) the value of the services of the real estate agent
Answer: D
3) Gross domestic product is calculated by summing up
A) the total quantity of goods and services in the economy.
B) the total quantity of goods and services produced in the economy during a period of time.
C) the total market value of goods and services in the economy.
D) the total market value of final goods and services produced in the economy during a period of
time.
Answer: D
4) Which of the following goods is directly counted in GDP?
A) the lettuce that Subway purchases for its sandwiches
B) the bread that Subway purchases for its sandwiches
C) a 12-inch Subway sandwich purchased by a student
D) the plastic bags that Subway purchases to wrap its sandwiches
Answer: C
5) Which of the following is not an example of a transfer payment?
A) unemployment insurance payments
B) health insurance payments to an army private
C) social security payments to retirees
D) social security payments to disabled persons
Answer: B
6) Which of the following is not a durable good?
A) furniture
B) automobile
C) clothing
D) refrigerator
Answer: C
7) To calculate GDP by the expenditure method, one must add
A) wages, rents, interest, and profits.
B) consumption spending, investment spending, government spending and net exports.
C) consumption spending, investment spending, government spending and exports.
D) labor, natural resources, entrepreneurship, and capital.
Answer: B
8) The purchase by a household in China of a CD produced in the United States is included in
U.S.
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Answer: D
9) What is the largest component of spending in the United States?
A) consumption spending
B) investment spending
C) government spending
D) net investment spending
Answer: A
10) When consumers are less confident about their jobs or incomes, they are more likely to
A) reduce purchases of durable goods than nondurable goods.
B) reduce purchases of nondurable goods and increase purchases of durable goods.
C) increase investment spending and decrease consumption spending.
D) increase consumption spending and decrease investment spending.
Answer: A
11) The sum of the value added of every firm involved in producing all final goods and services
________ gross domestic product.
A) equals
B) is greater than
C) is less than
D) is sometimes greater than and other times less than
Answer: A
12) Gross domestic product understates the total production of final goods and services because
of the omission of
A) the underground economy.
B) intermediate goods.
C) inflation.
D) exports.
Answer: A
13) Legalizing all forms of illegal activities
A) reduces GDP and the size of the underground economy.
B) reduces GDP and increases the size of the underground economy.
C) increases GDP and reduces the size of the underground economy.
D) increases GDP and increases the size of the underground economy.
Answer: C
14) The U.S. work week has declined from 60 hours in 1890 to 40 hours today. The impact of
the decline in working hours
A) increases U.S. GDP and increases the well-being of a typical working person in the U.S.
B) increases U.S. GDP and decreases the well-being of a typical working person in the U.S.
C) decreases U.S. GDP and increases the well-being of a typical working person in the U.S.
D) decreases U.S. GDP and decreases the well-being of a typical working person in the U.S.
Answer: C
15) Nominal GDP is GDP in a given year
A) adjusted for inflation.
B) adjusted for anticipated inflation.
C) valued in the prices of that year.
D) valued in the prices of the base year.
Answer: C
16) Real GDP is GDP in a given year
A) adjusted only for anticipated inflation.
B) adjusted only for unanticipated inflation.
C) valued in the prices of that year.
D) valued in the prices of the base year.
Answer: D
Table 8-9
Year
2008
2009
2010
2011
Nominal
GDP
$7,400
7,813
8,301
8,760
Real GDP
$7,537
7,813
8,165
8,516
17) Consider the following data on nominal GDP and real GDP (values are in billions of
dollars): The base year used in calculating real GDP is
A) 2008.
B) 2009.
C) 2010.
D) 2011.
Answer: B
18) If the quantity of goods and services produced in the economy decreases,
A) it may be possible for real GDP to increase.
B) real GDP would certainly increase.
C) it may be possible for nominal GDP to increase.
D) nominal GDP would certainly increase.
Answer: C
19) Which of the following could cause nominal GDP to decrease, but real GDP to increase?
A) The price level rises and the quantity of final goods and services produced rises.
B) The price level falls and the quantity of final goods and services produced rises.
C) The price level rises and the quantity of final goods and services produced falls.
D) The price level falls and the quantity of final goods and services produced falls.
Answer: B
20) To examine how the total production of an economy has changed over time, it would be
better to examine
A) real GDP.
B) nominal GDP.
C) GDP at current prices.
D) the GDP deflator.
Answer: A
21) If prices in the economy rise, then
A) the purchasing power of a dollar rises.
B) the purchasing power of a dollar stays constant.
C) the purchasing power of a dollar declines.
D) the purchasing power of a dollar cannot be determined.
Answer: C
22) The GDP deflator is the
A) difference between real GDP and nominal GDP multiplied by 100.
B) difference between nominal GDP and real GDP multiplied by 100.
C) ratio of real GDP to nominal GDP multiplied by 100.
D) ratio of nominal GDP to real GDP multiplied by 100.
Answer: D
23) The GDP deflator is a measure of the
A) total production of the economy adjusted for inflation.
B) total production of the economy unadjusted for inflation.
C) average level of prices of final goods and services in the economy.
D) average level of prices of intermediate goods and services in the economy.
Answer: C
24) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on
average, the cost of goods and services is
A) 5% higher in year 2 than in year 1.
B) 105% higher in year 2 than in year 1.
C) 5% higher in year 1 than in year 2.
D) 105% higher in year 1 than in year 2.
Answer: A
25) Gross national product, GNP, of the United States is the market value of all final goods and
services
A) produced within the United States.
B) consumed within the United States.
C) produced by citizens of the United States anywhere in the world.
D) consumed by citizens of the United States anywhere in the world.
Answer: C
26) The output of U.S. citizens who work in Canada would be included in the
A) gross domestic product of Canada.
B) gross national product of Canada.
C) gross domestic product of the United States.
D) gross national product of Canada and the gross national product of the United States.
Answer: A
27) The value of what a U.S.-owned McDonald's produces in South Korea is included in the U.S.
________ and the South Korean ________.
A) GDP; GDP
B) GNP; GDP
C) GDP; GNP
D) GNP; GNP
Answer: B
28) Depreciation is
A) the value of worn-out equipment, machinery, and buildings.
B) the value of the decrease in business inventory stocks.
C) the value of the addition to the capital stock.
D) the decline in the value of the stock market, net of dividends.
Answer: A
29) The best measure of the income households actually have available to spend is
A) personal income.
B) disposable personal income.
C) national income.
D) net national income.
Answer: B
Chapters 7 and 8 Unemployment and Inflation
1) The Bureau of Labor Statistics would categorize a retiree who is not working as
A) employed.
B) unemployed.
C) a discouraged worker.
D) out of the labor force.
Answer: D
2) The labor force equals the number of people
A) employed.
B) unemployed.
C) employed plus unemployed.
D) in the working-age population.
Answer: C
Table 9-1
Total population
Working-age population
Employment
Unemployment
20,000
15,000
1,000
100
Consider the data above for a simple economy.
3) The unemployment rate for this simple economy equals
A) (100/1,000) × 100.
B) (100/1,100) × 100.
C) (100/15,000) × 100.
D) (100/20,000) × 100.
Answer: B
4) The unemployment rate equals the number of unemployed divided by the ________, all times
100.
A) number of employed
B) labor force
C) working-age population
D) total population
Answer: B
5) Someone who is available for work but has not actively looked for work in the previous four
weeks would be classified as
A) employed.
B) unemployed.
C) not in the labor force.
D) not in the working-age population.
Answer: C
6) Which of the following explains the changes in the U.S. adult male labor force participation
rate since 1948?
A) more men are joining the military as compared to the past
B) more men are retiring later in life as compared to the past
C) fewer men consider themselves discouraged workers as compared to the past
D) younger men are remaining in school longer as compared to the past
Answer: D
7) Frictional unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
Answer: B
8) A student who just graduated from college but has not found a job would most likely be
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) seasonally unemployed.
Answer: A
9) Cyclical unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
Answer: D
10) Structural unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
11) In September 2011, Bank of America laid off 30,000 employees. The laid-off employees
who were not able to find jobs at another bank due to a permanent decline in business in the
financial industry would be considered
A) structurally unemployed.
B) frictionally unemployed.
C) seasonally unemployed.
D) cyclically unemployed.
Answer: A
12) According to the text, economists consider full employment to occur when
A) everyone who wants a job has a job.
B) frictional unemployment equals zero.
C) the sum of frictional unemployment and structural unemployment equals zero.
D) the unemployment rate consists of only frictional and structural unemployment.
Answer: D
13) The natural rate of unemployment is the amount of unemployment
A) associated with the business cycle.
B) equal to frictional plus structural unemployment.
C) that exists when the economy goes into recession.
D) that exists when the economy is in an expansion.
Answer: A
14) The advice to "retrain" would be most appropriate for which of the following types of
unemployment?
A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) core unemployment
Answer: B
15) The United States has ________ social insurance programs, and generally has a ________
unemployment rate, as compared to Canada and Western Europe.
A) less generous; lower
B) less generous; greater
C) more generous; lower
D) more generous; greater
Answer: A
16) If firms pay what are called "efficiency wages," they pay wages that
A) motivate workers to increase their productivity.
B) are lower than average to ensure maximum profit.
C) will eventually lower the unemployment rate.
D) are mandated by the government.
Answer: A
17) Which of the following is true about the consumer price index?
A) It accounts for people switching to goods whose prices have fallen.
B) It assumes that consumers purchase the same amount of each product in the market basket
each month.
C) It frequently updates the price changes of new products added to the market basket, as these
have a tendency to fall.
D) It filters out the part of price increases that occurs because of quality improvements in
products.
Answer: B
18) The consumer price index is the
A) cost of a market basket of goods and services typically consumed in the base year.
B) cost of a market basket of goods and services typically consumed in the current period.
C) average of the prices of the goods and services purchased by a typical urban family of four.
D) average of the prices of new final goods and services produced in the economy over a period
of time.
Answer: C
Table 9-2
Base Year (2006)
2011
Product
Milk
Bread
Quantity
50
100
Price
$1.20
1.00
Price
$1.50
1.10
19) Assume the market basket for the consumer price index has two products — bread and milk
— with the following values in 2006 and 2011 for price and quantity: The Consumer Price Index
for 2011 equals
A) 118.
B) 116.
C) 86.
D) 85.
Answer: B
20) Assume the average annual CPI values for 2010 and 2011 were 207.3 and 215.3,
respectively. What was the percent increase in the CPI between these two years?
A) 0.96
B) 1.04
C) 3.86
D) 8.0
Answer: C
21) A consumer price index of 160 in 1996 with a base year of 1982-1984 would mean that the
cost of the market basket
A) equaled $160 in 1996.
B) equaled $160 in 1983.
C) rose 160% from the cost of the market basket in the base year.
D) rose 60% from the cost of the market basket in the base year.
Answer: D
Table 9-5
Year
2010
2011
CPI
207
215
22) Consider the following values of the consumer price index for 2010 and 2011. The inflation
rate for 2011 was equal to
A) 215 percent.
B) 21.5 percent.
C) 8.0 percent.
D) 3.9 percent.
Answer: D
23) Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn
$35,000/year in your first job in 2011. You know that average prices have risen steadily since
1961. You earn
A) 5 times as much as your grandfather in terms of real income.
B) more than 5 times as much as your grandfather in terms of real income.
C) less than 5 times as much as your grandfather in terms of real income.
D) less than 5 times as much as your grandfather in terms of nominal income.
Answer: C
24) To reduce the bias in the consumer price index, the Bureau of Labor Statistics
A) updates the market basket every two years, rather than every 10 years.
B) updates the market basket every 10 years, rather than every two years.
C) incorporates substitutions by consumers when prices of specific products rise rapidly.
D) incorporates substitutions by consumers when prices of specific products fall rapidly.
Answer: A
25) The real wage equals the nominal wage ________ the CPI, all times 100.
A) divided by
B) times
C) minus
D) plus
Answer: A
26) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and
219 in 2010, then the value of your grandfather's salary in 2010 dollars is approximately
A) $84,775.
B) $63,830.
C) $37,200.
D) $26,280.
Answer: A
27) The real interest rate equals the nominal interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus
Answer: D
28) The stated interest rate on a loan is the
A) real interest rate.
B) nominal interest rate.
C) actual inflation rate.
D) expected inflation rate.
Answer: B
29) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of
interest?
A) -9.5%
B) -3.5%
C) 1.5%
D) 3.5%
E) 9.5%
Answer: D
30) When deflation occurs,
A) the real interest rate is greater than the nominal interest rate.
B) the nominal interest rate is greater than the real interest rate.
C) the nominal interest rate is equal to the real interest rate and inflation is negative.
D) the nominal interest rate is equal to the real interest rate and inflation is positive.
Answer: A
31) Which of the following describes a situation in which the person is hurt by inflation?
A) a retiree whose pension is adjusted for inflation
B) a person who borrows money during a period when inflation is under-predicted
C) a person who lends money during a period when inflation is over-predicted
D) a person paid a fixed income during an inflationary period
Answer: D
32) The cost to firms of changing prices
A) is small even when there is rapid inflation.
B) is called a menu cost.
C) does not exist if inflation is perfectly anticipated.
D) all of the above
Answer: B
33 When actual inflation is less than expected inflation,
A) borrowers lose and lenders gain.
B) borrowers gain and lenders lose.
C) borrowers and lenders both gain.
D) borrowers and lenders both lose.
Answer: A
Chapter 10 Aggregate Demand – Aggregate Supply Model
1.
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2.
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Which of the following will reduce aggregate demand?
a. an increase in real wealth
b. lower real incomes in foreign economies with whom an economy trades
c. increased consumer and business optimism about the future
d. an increase in the expected rate of inflation
An increase in the long-run aggregate supply curve shifts
a. both LRAS and AD to the right.
b. both LRAS and SRAS to the right.
c. both LRAS and AD to the left.
d. only LRAS to the right.
3.
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The permanent income hypothesis, developed by Milton Friedman, states that
a. consumption spending depends more on a person’s permanent (or lifetime) income than on
their current level of income.
b. consumption spending depends more on a person’s current level of income than on their
permanent (or lifetime) level of income.
c. income levels remain permanent over long periods of time.
d. any change in the economy will change income permanently.
4.
During recessions, interest rates tend to fall because
a. consumers attempt to borrow money to make up for their falling income.
b. business borrowing for investment purposes tends to fall during recessions.
c. lower real resource prices create profit opportunities for banks.
d. recessions shift the economy’s long-run aggregate supply curve to the left.
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5.
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6.
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In the short run, equilibrium output in the goods and services market may be either above or below
the full-employment level, but in the long run, it
a. must be less than full-employment output.
b. must be greater than full-employment output.
c. must be equal to full-employment output.
d. depends on aggregate demand, not just long-run aggregate supply.
In the aggregate demand/aggregate supply model, what market adjustments cause the economy to
return to its long-run capacity when output is temporarily greater than the economy’s long-run
potential output?
a. Lower wage rates and resource prices reduce short-run aggregate supply.
b. Lower interest rates increase aggregate demand and thereby stimulate output.
c. Higher wage rates and resource prices reduce short-run aggregate supply.
d. A decrease in the price level reduces aggregate demand.
7.
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8.
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9.
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10.
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Which of the following is most likely to result from an unanticipated increase in short-run aggregate
supply due to favorable weather conditions in agricultural areas?
a. an increase in the inflation rate
b. an increase in the unemployment rate
c. a decrease in the price level
d. a decrease in the natural rate of unemployment
Which of the following is most likely to accompany an unanticipated reduction in aggregate
demand?
a. an increase in the price level
b. a decrease in unemployment
c. an increase in real GDP
d. an increase in the unemployment rate
Which of the following is most likely to accompany an unanticipated increase in short-run
aggregate supply?
a. an increase in real GDP
b. a decrease in real GDP
c. an increase in the price level
d. an increase in the unemployment rate
In the aggregate demand/aggregate supply model, an economy operating below its long-run
potential capacity will experience
a. falling real wages and resource prices that will increase SRAS, moving the economy back
toward full employment.
b. rising interest rates that will increase SRAS, moving the economy back toward full
employment.
c. inflation that will stimulate additional spending and thereby restore full employment.
d. a prolonged economic depression unless consumer optimism is increased.
For the next four questions, assume that the economy is in long-run equilibrium in the aggregate
demand/aggregate supply model and that some sort of event takes place. In each case, mark the most
likely impact of the event on the aggregate demand/aggregate supply diagram given in the exhibit.
11.
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Good weather allows agricultural output to double.
a. The aggregate demand curve would shift to the right.
b. The aggregate demand curve would shift to the left.
c. The short-run aggregate supply curve would shift to the right.
d. The short-run aggregate supply curve would shift to the left.
12.
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13.
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14.
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15.
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There is an increase in the expected rate of inflation.
a. The aggregate demand curve would shift to the right.
b. The short-run aggregate supply curve would shift to the left.
c. The price level would rise and real GDP would remain the same.
d. All of the above are correct.
Consumers and businesses all suddenly decide that the future looks much better than it previously
had.
a. The aggregate demand curve would shift to the right.
b. The aggregate demand curve would shift to the left.
c. The short-run aggregate supply curve would shift to the right.
d. The short-run aggregate supply curve would shift to the left.
A major technological advance occurs.
a. The aggregate demand curve would shift to the right.
b. The aggregate demand curve would shift to the left.
c. Both the short-run and the long-run aggregate supply curves would shift to the right.
d. Both the short-run and the long-run aggregate supply curves would shift to the left.
Which of the following would not cause a shift in the short-run aggregate supply curve?
a. a major technological advance
b. a decrease in the real interest rate
c. a decrease in the expected rate of inflation
d. an increase in resource prices
16.
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Which of the following would not cause a shift in the aggregate demand curve?
a. a major technological advance
b. a decrease in the real interest rate
c. an increase in the expected rate of inflation
d. a stock market crash
17.
If an economy is in equilibrium at a given price level and a given output level, the aggregate
demand/aggregate supply (AD/AS) model indicates that an unanticipated decrease in aggregate
demand will cause
a. real output to decline.
b. the price level to fall.
c. unemployment to increase.
d. all of the above.
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18.
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19.
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Which of the following is most likely to accompany a fully anticipated reduction in short-run
aggregate supply?
a. an increase in the price level
b. a decrease in the price level
c. a decrease in real GDP
d. both a and c
During the 1990s, a financial crisis spread throughout Asia causing those economies to drop into
recessions. Other things constant, how would such a decrease in the income of foreign trading
partners have influenced the price level and output of the United States?
a. Both real output and the price level would have fallen.
b. Both real output and the price level would have risen.
c. Real output would have fallen, and the price level would have risen.
d. Real output would have risen, and the price level would have fallen.
20.
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21.
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22.
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If an innovation in automation allows cars to be produced with fewer resources, buyers and sellers
will plan for lower prices and larger supplies of cars. This is an example of
a. unforeseeable change.
b. anticipated change.
c. supply shock.
d. expansionary fiscal policy.
Which of the following will most likely occur in the United States as the result of an unexpected
rapid growth in real income in Japan and Europe?
a. a short-run increase in U.S. employment and output
b. a short-run decrease in U.S. employment and output
c. a short-run decline in prices in the United States
d. a reduction in the natural rate of unemployment in the United States
If there is an unanticipated increase in aggregate demand, which of the following is most likely to
occur?
a. an increase in the price level (inflation)
b. an increase in the rate of unemployment
c. a reduction in the growth rate of real GDP
d. a decrease in LRAS to restore full-employment
23.
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Which of the following will most likely increase the economy’s long-run aggregate supply?
a. advances in technology
b. unfavorable weather conditions in agricultural areas
c. an increase in the expected inflation rate
d. a low rate of investment
24.
If improvements in education and training programs increased the productivity of persons in the
labor force,
a. aggregate demand would decrease.
b. short-run aggregate supply would increase, but long-run aggregate supply would not change.
c. long-run aggregate supply would increase, but short-run aggregate supply would not change.
d. Both short-run and long-run aggregate supply would increase.
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25.
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26.
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27.
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The expenditure multiplier is used to calculate the change in
a. spending caused by a change in income.
b. equilibrium income resulting from a change in interest rates.
c. equilibrium income resulting from an independent change in spending.
d. investment caused by a change in consumption.
Which of the following is a major insight of the Keynesian model?
a. Changes in output, as well as changes in prices, play a role in the macroeconomic adjustment
process, particularly in the long run.
b. A general overproduction of goods relative to total demand is impossible because production
creates its own demand.
c. The responsiveness of aggregate demand to changes in supply will be directly related to the
availability of unemployed resources.
d. Fluctuations in aggregate demand are an important potential source of business instability.
If the MPC is 3/4, the simple expenditure multiplier is
a. 4.00.
b. 1.33.
c. 1.75.
d. 0.75.
28.
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29.
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If consumption equals 800 when disposable income is 1,000, and then consumption increases to
1,000 when disposable income increases to 1,300, the marginal propensity to consume is
a. 8/10.
b. 10/13.
c. 2/3.
d. 3/4.
“If there is unemployment, the average wage rate will decline as the unemployed workers choose
lower wages rather than going without a job. The demand curve for labor slopes downward and to
the right so that more workers would be hired at the lower wage rate, restoring full employment.”
According to the Keynesian view, this quote is
a. incorrect because widespread unemployment would cause wages to rise, not decline.
b. incorrect because the demand for labor, other things constant, will not be negatively related to
wages.
c. incorrect because wages and prices tend to be highly inflexible downward.
d. essentially correct.
The following information is relevant to the next two questions.
Assume IBM decides, despite an ongoing recession, to build a new branch for computer analysis in
Bozeman, Montana. The plant expects to spend $12 million to hire the necessary employees, all of
whom move in from out of state to take the jobs.
30.
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31.
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If the marginal propensity to consume in Bozeman was 3/4, what would be the total change in
income that would result from the operation of the plant for one year?
a. $12 million
b. $48 million
c. $9 million
d. $27 million
If Bozeman citizens decided to spend more than 3/4 of the additional income,
a. the MPC would decrease.
b. the expenditure multiplier would decrease.
c. the expansion in income would be larger.
d. aggregate expenditures would decline.
(Note: The next nine questions regard material covered in the addendum to the chapter on the Keynesian
model.)
32.
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33.
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34.
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In equation form, Keynesian macroeconomic equilibrium is attained when
a. total output = real GDP.
b. real GDP = planned consumption.
c. planned aggregate expenditures = total output.
d. C + I + G + NX = planned aggregate expenditures.
The primary determinant of consumer spending is
a. the interest rate.
b. disposable income.
c. expectations of inflation.
d. the stage of the business cycle.
Which of the following best describes a consumption function?
a. a function that relates consumption to savings
b. a function that relates investment to the interest rate
c. a function that relates consumption to disposable income
d. All of the above are correct; the consumption function includes all three relationships.
35.
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36.
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37.
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38.
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39.
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40.
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41.
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42.
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Which of the following is most likely to lead to an increase in current consumption?
a. an increase in personal income tax rates
b. an increase in one’s expected future income
c. a decrease in one’s marginal propensity to consume
d. an increase in the interest rate
If the economy is operating at a point where the aggregate expenditure line lies below the 45-degree
line (AE = GDP),
a. total spending is more than total output.
b. unwanted business inventories will increase.
c. businesses will reduce their future production.
d. both b and c are correct.
In the Keynesian aggregate expenditure model, the term “autonomous expenditures” is used when
referring to those expenditures that do not depend on the
a. difference between planned and actual.
b. level of income.
c. interest rate.
d. price level.
If consumption expenditures are $180, total planned investment is $75, government purchases are
$40, exports are $20, imports are $40, and taxes are $25, aggregate demand must be
a. $225.
b. $250.
c. $275.
d. $355.
Keynesian analysis suggests that if planned spending (aggregate demand) were $700 billion but
GDP was $800 billion,
a. businesses would accumulate inventories, and output would fall.
b. output would rise, incomes would rise, and tax revenues would automatically increase.
c. production would be stimulated, and output would increase, unless the full-capacity output was
less than $950 billion.
d. the Federal Reserve would eventually lower interest rates.
In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
a. the employment rate equals approximately 96 percent.
b. actual saving equals actual investment.
c. planned aggregate expenditures exceed actual output.
d. actual output equals planned aggregate expenditures.
Which of the following would be most likely to cause a reduction in current aggregate demand in
the United States?
a. Increased business optimism about the future.
b. The economies of key trading partners fall into a recession.
c. A sharp increase in the value of stocks owned by Americans.
d. An increase in the expected rate of inflation.
Which of the following will most likely cause an increase (shift to the right) in both the long-run
and short-run aggregate supply curves?
a. an increase in the national debt
b. an increase in income tax rates
c. a decrease in the economy's rate of investment and capital formation
d. a technological improvement in robotics that substantially increases labor productivity
43.
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44.
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Which of the following will most likely occur in the short run when the long-run equilibrium of an
economy is disturbed by an unanticipated decrease in aggregate demand?
a. a decrease in output and a higher price level
b. an increase in output and a higher price level
c. a decrease in output and a lower price level
d. an increase in output while prices remain unchanged
A rise in the price of oil would be most likely to cause which of the following in the United States?
a. an economic boom
b. an economic slowdown or recession
c. a decrease in the general level of prices
d. an increase in aggregate demand
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When an economy is experiencing an economic boom and operating beyond its long-run capacity,
a. strong demand for investment funds will push interest rates upward.
b. weak demand for resources will push the prices of resources downward.
c. weak demand for investment funds will cause the real interest rate to decline.
d. the unemployment rate will be greater than its natural rate.
46.
When an economy is in a recession,
a. strong demand for investment funds will push interest rates upward.
b. strong demand for resources will push the prices of resources upward.
c. the real interest rate will tend to rise.
d. the unemployment rate will rise above its natural rate.
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47.
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48.
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49.
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If a market economy was in a recession, which of the following would help direct it back toward the
full employment rate of output?
a. an increase in the rate of inflation
b. lower resource prices and lower real interest rates
c. higher resource prices and higher real interest rates
d. a decrease in the natural rate of unemployment
Which of the following will cause an increase in aggregate demand within the AS/AD model?
a. a decrease in prices
b. a decrease in the real interest rate
c. a decrease in consumer optimism as measured by the consumer sentiment index
d. a decrease in foreign incomes abroad
According to the permanent income hypothesis, consumption by a family depends primarily on the
family's
a. current income.
b. education level.
c. expected long-term income.
d. earnings derived from the stock market.
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51.
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52.
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53.
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54.
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Starting from long-run equilibrium at point A, which of the following points would occur
immediately following an unanticipated decrease in stock prices?
a.
b.
c.
d.
A
B
C
D
Which is most likely to cause a temporary spurt in the growth of GDP that cannot be maintained in
the long run?
a. An unanticipated increase in aggregate demand.
b. An anticipated increase in aggregate demand.
c. An increase in long run aggregate supply (LRAS).
d. An increase in wage rates
If the general level of prices is lower than business decision makers anticipated when they entered
into long-term contracts for raw materials and other resources, which of the following is most likely
to occur?
a. An economic boom.
b. Highly attractive profit margins.
c. An actual rate of unemployment that is greater than the natural rate of unemployment
d. A sharp increase in imports.
With regard to the business cycle, most modern economists believe that
a. once a recession starts, market forces are incapable of preventing the economy from plunging
deeper and deeper into a depression.
b. market economies will experience lengthy periods of recession pretty much regardless of what
policy makers do.
c. the economy’s self-corrective mechanism will quickly restore full employment regardless of
the choices made by policy makers.
d. lower real interest rates and reductions in real resource prices will help direct an economy out
of recession.
The marginal propensity to consume (MPC) is
a. consumption expenditures divided by saving.
b. consumption expenditures divided by disposable income.
c. consumption expenditures divided by personal income.
d. additional consumption expenditures divided by additional disposable income.
55.
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If a market economy was in a recession, which of the following would help direct it back toward the
full employment rate of output?
a. an increase in the rate of inflation
b. lower resource prices and lower real interest rates
c. higher resource prices and higher real interest rates
d. a decrease in the natural rate of unemployment