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Multiple Choice Questions Chapter 1 1. (page 1) Roughly how much richer are we now than our parents were back when they were our age? a. 10% b. 50%** c. 100% d. 200% 2. (page 1) If current rates of economic growth continue, about how much richer will our children be than our grandparents were? a. Not at all b. 50% c. 400%** d. 1000% 3. (page 1) What economic variable determines whether we find it easy to change jobs, or find it hard to change jobs and feel pretty much trapped doing whatever we are doing? a. The inflation rate b. The real interest rate c. The nominal interest rate d. The unemployment rate 4. (page 1) An unexpected rise in inflation is likely to… a. …make debtors wealthier, and creditors poorer** b. …make debtors wealthier, and creditors wealthier c. …make debtors poorer, and creditors poorer c. …make debtors poorer, and creditors wealthier 5. (page 2) Macroeconomics tries principally to figure out… a. …the causes of increases or decreases in measures of total economic activity** b. …the price of macros c. …the determinants of the price level and inflation only: the level of economic activity is determined by microeconomic supply and demand d. …what determines the level of the stock market and of interest rates 6. (page 2) The inflation rate is… a. …the speed with which the universe flattened out very early after its creation in the Big Bang b. …the absolute rate of increase in the price level c. …the proportional rate of increase of the price level** d. …the change in the price of gold, the principal monetary metal throughout human history 7. (page 3) The three reasons to care about macroeconomics do NOT include: a. A knowledge of macroeconomics helps you to be culturally literate b. A knowledge of macroeconomics helps you to understand the factors affecting your economic destiny c. A knowledge of macroeconomics makes you a more informed voter and a better citizen d. A knowledge of macroeconomics helps you make money by guessing which way the stock market is going to move** 8. (page 7) Richard Nixon believed that he lost the election of 1960 because… a. …John F. Kennedy made a better President b. …the Eisenhower administration--in which Nixon was Vice-President-refused to take steps to generate good economic news in the months immediately before the 1960 election** c. …stagflation--rising inflation and rising unemployment--set in the early 1970s d. …Nixon took steps that harmed the long-run health of the economy in order to try to produce good economic numbers in the months just before the 1960 election 9. (page 12) Business cycles are… a. …fluctuations in employment and production, unconnected with fluctuations in prices and interest rates b. …fluctuations in prices and interest rates, unconnected with fluctuations in employment and production c. …fluctuations in employment and production accompanied by fluctuations in prices, interest rates, and stock market values** d. …changes in the long-run economic destinies of nations--like that which has made Sweden today so much richer than Argentina 10. (page 10) Depressions are to be… a. …feared because they bring high unemployment, low production, and low incomes** b. …welcomed because they lead to the bankruptcy of inefficient firms; more efficient producers can then use the idle labor and capital to expand production in the next upswing c. …welcomed because they bring lower prices: when prices are lower, your income can buy more things d. …welcomed because they bring a high-pressure economy with low rates of unemployment and high rates of real income growth 11. (page 14) One key difference between macroeconomics and microeconomics is that… a. …macroeconomics assumes that decision makers react first by changing prices, and only then by changing quantities b. …macroeconomics assumes that total incomes are constant c. ….macroeconomics does not worry about how expectations are formed d. …macroeconomics considers the possibility that decision makers in the economy react first by changing the quantities they produce, and only later by changing the prices they charge** 12. (page 14) Another key difference between macroeconomics and microeconomics is that… a. …microeconomics focuses on the economy as a whole b. …microeconomics spends a great deal of time and energy investigating how expectations are formed c. …microeconomics focuses on how changes in total economy-wide incomes change economic behavior d. …microeconomics focuses on the markets for individual commodities and the decisions of individual households and firms** 13. (page 15) The failure to fully integrate microeconomics and macroeconomics is… a. …a horrible flaw in the fabric of economics that needs to be fixed as soon as possible b. …an annoyance, but one that is not terribly relevant c. …no longer the case: microeconomics and macroeconomics were woven together into the Unified Field Theory of Economics in the mid-1990s d. …either a horrible flaw or an irrelevant annoyance, but economists disagree vehemently about which** 14. (page 16) The principal source of data about the state and direction of the economy comes from the… a. …National Income and Product Accounts** b. … International Financial Statistics c. …IMF-WTO International Surveillance Documents d. …Labor Department Employment and Earnings Reports 15. (page 17) The most important and useful economic statistics tend to be reported a. annually b. quarterly or monthly** c. daily d. weekly 16. (page 18) The economic variables that are most directly and immediately connected to our material well-being are: a. The interest rate and the exchange rate b. Real GDP and the unemployment rate** c. The inflation rate and the price level d. The level of the stock market and the real interest rate 17. (page 19) Real GDP counts the production of a. consumption goods, investment goods, and goods and services the government purchases** b. consumption goods, exports, and intermediate goods c. final goods except for those that the government purchases d. intermediate goods plus net imports 18. (page 20) Real GDP is a. a statistic rarely used any more b. the best readily-available indicator of how well the economy considered as a mechanism for producing necessities, conveniences, and luxuries is performing** c. a major conceptual improvement over its predecessor, real GNP d. the single most important measure of the overall price level 19. (page 20) Real GDP is not a direct measure of consumer utility or material wellbeing because a. it values goods by their market prices, not by how much consumer satisfaction they provide on average** b. consumers purchase not the goods that enhance their well-being but the goods that advertisers tell them to purchase c. real GDP does not count so-called "intermediate goods" d. real GDP includes goods purchased by the government 20. (page 21) An event which was NOT one of the major macroeconomic events of the twentieth century in the U.S. was a. the Great Depression of the 1930s b. the productivity slowdown--the period of stagnation following the 1973 oil price increase c. the boom during World War II in the 1940s d. the assassination of John F. Kennedy in 1963** 21. (page 23) An economy in which each business filled a vacancy with the first applicant and in which each unemployed person searching for a job took the first one offered would be a. a high-productivity economy because there would be next to no unemployment b. an economy with inflation because the low level of unemployment would put upward pressure on prices c. a relatively low-productivity economy because workers would be poorly matched to jobs and jobs would be poorly matched to workers** d. a high-unemployment economy because often businesses would find that the first applicant for a job doesn't work out, and fire them 22. (page 24) During a Depression, a large proportion of unemployment a. is not "frictional" but is "cyclical"* b. is not "cyclical" but is "frictional" c. is neither "cyclical" nor "frictional" but "structural" d. is neither "cyclical," "frictional," nor "structural" 23. (page 24) When unemployment is high because a depression has created a large amount of cyclical unemployment, then a. workers are being choosy about which jobs they take and so the economy is doing good well at matching workers to jobs and jobs to workers b. the market economy is not working well, because a large amount of cyclical unemployment means that production is far below the level of potential output** c. the high unemployment rate indicates that real GDP is above potential output d. workers' skills and labor-power are being used to make useful goods and services in the most efficient manner possible 24. (page 25) Since World War II the highest peak of the unemployment rate in the U.S. has been a. nearly ten percent in 1982** b. nearly eight percent in 1979 c. some twenty-five percent in 1933 d. today, as rapid improvements in computers create mass technological unemployment 25. (page 25) Over the past century the highest peak of the unemployment rate in the U.S. has been a. nearly ten percent in 1982 b. nearly eight percent in 1979 c. some twenty-five percent in 1933** d. today, as rapid improvements in computers create mass technological unemployment 26. (page 26) If the inflation rate this year is ten percent, then a. the average good's price in dollars this year is ten percent higher than the average good's price in dollars was last year** b. every good and service costs ten percent more in dollars than it cost last year c. the average good costs ten percent more in terms of how many other goods need to be sold in order to get the money to buy it d. the overall price level is ten percent more than it was in the base year of 1962 27. (page 26) A very high inflation rate of more than twenty percent per month usually a. causes a boom as too much money chases too few goods, and production expands. b. causes massive economic destruction as the price system breaks down and businesses find that they can no longer use prices and costs to make rational economic decisions** c. means that you should lend your money out as fast as possible in order to earn the high real interest rates that accompany hyperinflation d. means that everyone needs to buy a wheelbarrow to carry their money 28. (page 27) In modern industrial nations, voters a. love moderate inflation, and reelect politicians who preside over eras of inflation with high majorities b. dislike moderate inflation, and usually reject candidates--like Jimmy Carter or James Callaghan in the 1970s--who preside over eras of inflation** c. are confused during times of inflation because they cannot figure out the best use of their financial resources d. put their trust in mutual fund managers to determine how best to guard against inflation 29. (page 27) The highest rates of inflation in the U.S. in the twentieth century came a. In the 1970s, when Jimmy Carter was President b. In the 1980s, when Ronald Reagan was President c. During World Wars I and II** d. During World War I, but not during World War II 30. (page 28) The last year in which the U.S. saw deflation--a falling price level-came a. In the 1970s, when Jimmy Carter was President b. In the 1980s, when Ronald Reagan was President c. In the 1990s, when Bill Clinton was President d. Back in the late 1940s, when Harry Truman was President** 31. (page 29) Inflation during the 1950s and 1960s was a. "creeping" inflation, too small and too slow for anyone to pay much attention to it** b. "trotting" inflation, large enough to cause concern but too small to significantly distort the economy c. "galloping" inflation, causing great damage to the price system's ability to coordinate economic activity d. hyperinflation, causing the Great Depression of the 1970s 32. (page 29) Inflation during the 1970s was a. "creeping" inflation, too small and too slow for anyone to pay much attention to it b. "trotting" inflation, large enough to cause concern but too small to significantly distort the economy** c. "galloping" inflation, causing great damage to the price system's ability to coordinate economic activity d. hyperinflation, causing the Great Depression of the 1980s 33. (page 29) The sharp fall in inflation in the early 1980s was caused by a. a sharp decline in oil prices b. Federal Reserve Chair Paul Volcker's decision to raise interest rates to reduce the growth of real GDP and to keep real GDP from growing until inflation had fallen** c. a natural bounce-back from the "trotting" inflation of the 1970s d. the workings of the gold standard, which prohibit one country on the gold standard from long maintaining an inflation rate different from the world average 34. (page 29) The interest rate is a. the price (in terms of extra purchasing power you must pay in the future in interest) of moving purchasing power from the future forward in time to the present** b. the higher price that goods in the future have relative to goods in the present c. a technical expression for how interested voters are in the economy d. a variable chiefly of interest to microeconomists 35. (page 30) Interest rates on long-term debt are a. almost always lower than interest rates on short-term debt--a phenomenon called the upward-sloping yield curve b. usually higher than interest rates on short-term debt--a phenomenon called the upward-sloping yield curve** c. sometimes higher and sometimes lower than interest rates on short-term debt in no particular pattern d. kept by law from falling below six percent per year 36. (page 31) Since the Volcker disinflation of the early 1980s, real interest rates have been a. lower than they were in the 1960s and 1970s b. higher than they were in the 1960s and 1970s** c. on average the same as in the 1960s and 1970s, but more volatile d. on average the same as in the 1960s and 1970s, but less volatile 37. (page 32) The level of the stock market is a. the economic quantity that you hear most often in newscasts** b. an economic quantity about which information is scarce and hard to find c. something of relevance for understanding the sources of previous economic fluctuations d. not important for macroeconomists 38. (page 32) A high level of the stock market indicates that a. investors think that economic growth will be slow in the future, so they are eager to buy stocks now b. investors think that the economic future will be bright** c. investors have confused real with nominal prices, and are willing to pay high prices just because they think that average opinion expects average opinion to be willing to pay high prices for stocks d. investors think that economic growth will be slow, but that the share of profits in total income will be low as well--so justifying a high valuation of the stock market 39. (page 32) On average over the past century, an average share of stock has traded for about a. fifteen times its previous year's "trailing" earnings--half the value stocks had at the end of the second millennium** b. thirty times its previous year's "trailing" earnings--about equal to the value stocks had at the end of the second millennium c. fifteen times its previous year's "trailing" earnings--about equal to the value stocks had at the end of the second millennium d. thirty times its previous year's "trailing" earnings--about twice the value stocks had at the end of the second millennium 40. (page 34) The nominal exchange rate is a. the price at which goods exchange for services b. the price at which the money of one country can be exchanged for the money of another** c. a poor measure of the prices at which commodities move across national borders, for most shipments occur within multinational corporations d. the price at which not monies but goods made in one country exchange for not monies but goods made in another 41. (page 35) The U.S. nominal exchange rate a. has been remarkably constant since 1973, never moving more than ten percent above or ten percent below its 1973 value b. has been extremely volatile since 1973, falling by more than 1/3 between 1979 and 1985** c. has been extremely volatile since 1973, rising by more than 1/3 between 1979 and 1985 d. had been constant from 1973 to 1995, but has then been extremely volatile 42. (page 35) When the dollar becomes worth more in terms of foreign currencies, we say that a. the dollar has appreciated and the value of the exchange rate has declined** b. the dollar has appreciated and the value of the exchange rate has risen c. the dollar has depreciated and the value of the exchange rate has declined d. the dollar has depreciated and the value of the exchange rate has risen 43. (page 35) When the dollar becomes worth less in terms of foreign currencies, we say that a. the dollar has appreciated and the value of the exchange rate has declined b. the dollar has appreciated and the value of the exchange rate has risen c. the dollar has depreciated and the value of the exchange rate has declined d. the dollar has depreciated and the value of the exchange rate has risen** 44. (page 36) Before 1973, the U.S.'s exchange rate was a. fixed according to the rules of the Bretton Woods system** b. floating--free to move up and down according to supply and demand in the foreign-exchange market--according to the rules of the Bretton Woods system c. free to appreciate but not depreciate, according to the rules of the Bretton Woods system d. neither fixed nor floating 45. (page 36) Since 1973, the U.S.'s exchange rate has been a. fixed b. floating--free to move up and down according to supply and demand in the foreign-exchange market** c. free to appreciate but not depreciate, according to the rules of the Bretton Woods system d. neither fixed nor floating 46. (page 36) When interest rates in the U.S. increase, the value of the exchange rate is likely to a. fall, and the dollar to appreciate** b. fall, and the dollar to depreciate c. rise, and the dollar to appreciate d. rise, and the dollar to depreciate