MAcro 2

1. Economic growth is best defined as an increase in:
A. either real GDP or real GDP per capita.
B. nominal GDP.
C. total consumption expenditures.
D. wealth in the economy.

A. either real GDP or real GDP per capita.

2. Real GDP per capita is found by:
A. adding real GDP and population.
B. subtracting population from real GDP.
C. dividing real GDP by population.
D. dividing population by real GDP.

C. dividing real GDP by population.

3. Real GDP per capita:
A. cannot grow more rapidly than real GDP.
B. cannot grow more slowly than real GDP.
C. necessarily grows more rapidly than real GDP.
D. can grow either more slowly or more rapidly than real GDP.

D. can grow either more slowly or more rapidly than real GDP.

4. Which of the following best measures improvements in the standard of living of a nation?
A. growth of nominal GDP
B. growth of real GDP
C. growth of real GDP per capita
D. growth of national income

C. growth of real GDP per capita

5. If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, its real GDP per capita will:
A. remain constant.
B. fall by 6 percent.
C. rise by 6 percent.
D. fall by 12 percent.

A. remain constant.

6. For a nation's real GDP per capita to rise during a year:
A. consumption spending must increase.
B. real GDP must increase more rapidly than population.
C. population must increase more rapidly than real GDP.
D. investment spending must increase.

B. real GDP must increase more rapidly than population.

7. Growth is advantageous to a nation because it:
A. promotes faster population growth.
B. lessens the burden of scarcity.
C. eliminates the economizing problem.
D. slows the growth of wants.

B. lessens the burden of scarcity.

8. For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic growth would be changes in:
A. total nominal output.
B. total real output.
C. per capita output.
D. per family output.

B. total real output.

21. Under what circumstances do rates of economic growth understate the growth of economic well-being?
A. Economic growth has occurred because of increased length of the workweek.
B. Product quality has improved.
C. Air quality has declined as real GDP has increased.
D. Population has grown faster than real output.

B. Product quality has improved.

22. Which of the following statements is most accurate about modern economic growth?
A. Economic historians mark modern economic growth as beginning around A.D. 1500.
B. Modern economic growth is characterized by sustained and ongoing increases in living standards.
C. Modern economic growth has virtually eliminated business cycle fluctuations.
D. Modern economic growth has been distributed more or less equally across nations.

B. Modern economic growth is characterized by sustained and ongoing increases in living standards.

23. Countries that have experienced modern economic growth have also tended to:
A. adopt feudalistic institutions.
B. restrict women and minorities from holding certain economic and political positions.
C. move toward more democratic forms of government.
D. have less leisure time for sport and artistic activities.

C. move toward more democratic forms of government.

24. The Industrial Revolution and modern economic growth resulted in:
A. the average human lifespan more than doubling.
B. a major population shift from urban to rural areas.
C. increased production by local craftsmen.
D. all of these.

A. the average human lifespan more than doubling.

30. As of 1998, living standards in the United States were nearly ______ times higher than those in Africa.
A. 3
B. 8
C. 14
D. 20

D. 20

32. Real GDP per capita in the United States (as of 2007) exceeds that of France primarily because:
A. the United States had higher annual rates of growth than France from 1960 through 2007.
B. the United States has a much larger population than France.
C. the United States has a higher percentage of the working-age population in the labor force and because U.S. employees average about 20 percent more hours worked per year.
D. European Union rules severely limit France's access to technologies developed outside the region.

C. the United States has a higher percentage of the working-age population in the labor force and because U.S. employees average about 20 percent more hours worked per year.

33. Based on the annual number of hours worked per capita, labor supply in the United States exceeds that of France by about _______ percent.
A. 20
B. 40
C. 51
D. 62

B. 40

34. Strong property rights are important for modern economic growth because:
A. they allow governments to extract the gains from private citizens' investments.
B. people are more likely to invest if they don't fear that others can take their returns on investment without compensation.
C. they ensure an equitable distribution of income.
D. business cycle fluctuations will be smaller and less likely to disrupt investment patterns.

B. people are more likely to invest if they don't fear that others can take their returns on investment without compensation.

35. Which of the following institutional structures is most likely to promote growth?
A. A well-enforced system of patents and copyrights.
B. A tightly regulated market system.
C. A system of tariffs and other trade barriers to protect domestic companies.
D. All of these.

A. A well-enforced system of patents and copyrights.

36. Which of the following institutional arrangements is most likely to promote growth?
A. Patents and copyrights that expire quickly and are loosely enforced.
B. Strong government control over resource allocation decisions.
C. Unrestricted trade between nations.
D. All of these.

C. Unrestricted trade between nations.

37. A competitive market system:
A. encourages growth by allowing producers to make profitable investment decisions based on market signals.
B. encourages growth by ensuring that everyone in society will receive a decent standard of living.
C. discourages growth because firms busy competing have no time to innovate or invest.
D. discourages growth unless government protects domestic firms from foreign competition.

A. encourages growth by allowing producers to make profitable investment decisions based on market signals.

38. Free trade:
A. discourages growth by increasing competitive pressures on domestic firms.
B. encourages growth by effectively eliminating all patent and copyright barriers to growth.
C. discourages growth compared to situations where the government strongly controls foreign trade.
D. encourages growth by promoting the rapid spread of new inventions and innovations.

D. encourages growth by promoting the rapid spread of new inventions and innovations.

45. The achievement of full employment through time will:
A. diminish labor productivity.
B. reduce the level of investment as a percentage of GDP.
C. increase the realized rate of economic growth.
D. have no impact on the rate of economic growth.

C. increase the realized rate of economic growth.

46. Economic growth can be portrayed as:
A. an outward shift of the production possibilities curve.
B. an inward shift of the production possibilities curve.
C. a movement from a point on to a point inside a production possibilities curve.
D. a movement from one point to another point on a fixed production possibilities curve.

A. an outward shift of the production possibilities curve.

49. Suppose that an economy's labor productivity fell by 3 percent and its total worker-hours remained constant between year 1 and year 2. We could conclude that this economy's:
A. real GDP declined.
B. capital stock increased.
C. production possibilities curve shifted outward.
D. actual production moved from one point to another on a fixed production possibilities curve.

A. real GDP declined.

57. Labor productivity is measured by:
A. the ratio of capital to labor.
B. real output per worker hour.
C. real output per capita.
D. the ratio of worker hours to real GDP.

B. real output per worker hour.

58. Labor productivity is defined as:
A. total output/worker-hours.
B. nominal GDP minus real GDP.
C. the ratio of real capital to worker-hours.
D. the annual increase in nominal GDP per worker.

A. total output/worker-hours.

60. If the number of worker-hours in an economy is 100 and its labor productivity is $5 of output per worker-hour, the economy's real GDP:
A. is $20.
B. is $500.
C. is $5000.
D. cannot be calculated.

B. is $500.

61. Suppose total output (real GDP) is $4000 and labor productivity is $8. We can conclude that:
A. real GDP per capita must be $500.
B. the price-level index must be greater than 100.
C. nominal GDP must be $500.
D. the number of worker-hours must be 500.

D. the number of worker-hours must be 500.

62. Suppose total output (real GDP) is $10,000 and worker-hours are 20,000. We can conclude that:
A. real GDP per capita must be $200,000.
B. the price-level index must be less than 100.
C. labor productivity must be $0.5.
D. nominal GDP must be between $10,000 and $20,000.

C. labor productivity must be $0.5.

63. The percentage of the working-age population in the labor force (= employed + officially unemployed) is called the:
A. labor force participation rate.
B. employment-population ratio.
C. work-activity rate.
D. work-nonwork ratio.

A. labor force participation rate.

64. Other things equal, which of the following would decrease the rate of economic growth, as measured by changes in real GDP?
A. An increase in the educational attainment of the labor force
B. A permanent decrease in frictional unemployment
C. An increase in the amount of capital per worker
D. A decrease in the labor force participation rate

D. A decrease in the labor force participation rate

65. Other things equal, which of the following would increase the rate of economic growth, as measured by changes in real GDP?
A. A decline in the average length of the work week.
B. A decrease in the labor force participation rate.
C. An increase in the size of the working age population.
D. A decline in the amount of capital per worker.

C. An increase in the size of the working age population.

66. Which of the following would not be expected to increase labor productivity?
A. technological advance
B. the acquisition of more education and training by the labor force
C. an increase in the size of the labor force
D. the realization of economies of scale

C. an increase in the size of the labor force

68. Empirical studies suggest that:
A. labor productivity has declined throughout U.S. history.
B. technological advances account for about 40 percent of U.S. productivity growth.
C. the achieving of economies of scale is the most important factor in U.S. economic growth.
D. all U.S. economic growth from between 2001 and 2007 can be attributed to increases in the quantity of labor.

B. technological advances account for about 40 percent of U.S. productivity growth.

69. Between 2009 and 2020, productivity growth is expected to account for about ________ percent of the growth of real GDP in the United States.
A. 23
B. 40
C. 75
D. 92

D. 92

70. The largest contributor to increases in the productivity of American labor is:
A. the reallocation of labor from agriculture to manufacturing.
B. improvements in labor quality.
C. increases in the quantity of capital.
D. technological advance.

D. technological advance.

71. Which of the following statements is correct?
A. The U.S. population has increased more rapidly than real GDP in recent decades.
B. Improved education and training of labor is the most important source of U.S. productivity growth.
C. The average American factory worker has about 16 years of formal education.
D. The amount of real capital used per worker has increased historically in the United States.

D. The amount of real capital used per worker has increased historically in the United States.

72. The historical reallocation of labor from agriculture to manufacturing in the United States has:
A. been inflationary.
B. had no effect on the average productivity of labor.
C. increased the average productivity of labor.
D. reduced the average productivity of labor.

C. increased the average productivity of labor.

73. More than half the growth of real GDP in the United States is caused by:
A. a falling price level.
B. the reallocation of labor from manufacturing to agriculture.
C. increases in the productivity of labor.
D. the use of fewer inputs of labor.

C. increases in the productivity of labor.

74. Which of the following is the largest contributor to the growth of labor productivity in the United States?
A. technological advance
B. education and training of labor
C. economies of scale
D. improved resource allocation

A. technological advance

75. A nation's infrastructure refers to:
A. its ability to realize economies of scale.
B. its stock of technological knowledge.
C. public capital goods such as highways and sanitation systems.
D. the productivity of its labor force.

C. public capital goods such as highways and sanitation systems.

76. Economies of scale refer to:
A. the idea that proprietorships are less bureaucratic and therefore more efficient than corporations.
B. public investments in highways, schools, utilities, and such.
C. the fact that large producers may be able to use more efficient technologies than smaller producers.
D. the reallocation of labor from less-productive to more-productive uses.

C. the fact that large producers may be able to use more efficient technologies than smaller producers.

77. Other things equal, if a full-employment economy reallocated a substantial quantity of its resources to capital goods, we would expect:
A. present consumption to rise.
B. future consumption to fall.
C. a lower rate of growth of real GDP.
D. labor productivity to rise.

D. labor productivity to rise.

79. Human capital refers to:
A. the skills and knowledge that enable a worker to be productive.
B. machinery used by labor in production.
C. the accumulated financial wealth of households.
D. physical capital owned by households rather than businesses.

A. the skills and knowledge that enable a worker to be productive.

80. What percentage of the U.S. adult population has at least a high school education (as of 2009)?
A. 29 percent
B. 41 percent
C. 87 percent
D. 95 percent

C. 87 percent

81. What percentage of the U.S. adult population has a college or post-college education (as of 2009)?
A. 8 percent
B. 29 percent
C. 41 percent
D. 87 percent

B. 29 percent

86. The annual growth of U.S. labor productivity:
A. was greater between 1973 and 1995 than between 1995 and 2009.
B. was greater between 1995 and 2009 than between 1973 and 1995.
C. was negative in the late 1990s.
D. averaged nearly 5 percent in the 1990s.

B. was greater between 1995 and 2009 than between 1973 and 1995.

87. The period in the U.S. economy from 1995 to 2009 is characterized by:
A. a higher trend rate of saving.
B. a higher natural rate of unemployment.
C. a higher trend rate of productivity growth.
D. the end of the business cycle.

C. a higher trend rate of productivity growth.

88. Increases in the value of a product to each user, including existing users, as the total number of users rises are called:
A. information cascades.
B. learning effects.
C. network effects.
D. scale economies.

C. network effects.

89. Network effects are:
A. increases in the value of a product to each user, including existing users, as the total number of users rises.
B. reductions in per unit production cost as firms learn by doing.
C. increases in demand resulting from products being mentioned positively in a television program.
D. the change in real GDP resulting from a change in investment or government spending.

A. increases in the value of a product to each user, including existing users, as the total number of users rises.

94. Economists who believe that the recent rise in the average rate of productivity growth may be long-lasting claim that the above-normal economic growth in the United States between 1995 and 2009 was caused by:
A. increases in the rate of personal saving.
B. increased entrepreneurial activity, application of information technology, and global competition.
C. rising Federal budget surpluses that reduced real interest rates.
D. expansionary monetary policy.

B. increased entrepreneurial activity, application of information technology, and global competition.

95. Economists who believe that the recent rise in the average rate of productivity growth will be long lasting say that:
A. the United States is entering an era of high structural unemployment due to rapid technological change.
B. technological advance creates its own supply, which in turn creates its own demand.
C. innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy's potential economic growth rate.
D. technological change will require more central planning and government regulation.

C. innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy's potential economic growth rate.

96. Between 1995 and 2009, the U.S. productivity rate:
A. was slightly negative, mainly because of record levels of employment growth.
B. grew substantially compared to prior years, leading some economists to predict a long-lasting resurgence of productivity growth.
C. slowed considerably relative to the high rates between 1990 and 1995.
D. reached record low levels for the United States' economy, leading some economists to talk of a long-term trend of stagnation.

B. grew substantially compared to prior years, leading some economists to predict a long-lasting resurgence of productivity growth.

99. Critics of economic growth:
A. contend that growth and industrialization reduce pollution.
B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.
C. point out that growth results in greater economic security for workers.
D. say that its benefits accrue nearly exclusively to white males.

B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.

107. (Last Word) Over the past twenty-five years, China has averaged annual growth rates of nearly:
A. 5 percent.
B. 9 percent.
C. 12 percent.
D. 15 percent.

B. 9 percent.

108. (Last Word) Growth of real per capita income and China has largely resulted from:
A. increased use of technology and improved technology.
B. population decline.
C. reduced unemployment rates.
D. its trade deficit with the United States.

A. increased use of technology and improved technology.

109. (Last Word) Which of the following problems has not accompanied China's rapid economic growth over the past twenty-five years?
A. High rates of inflation.
B. Structural unemployment of displaced agricultural workers.
C. Uneven economic development.
D. Falling per capita income.

D. Falling per capita income.

111. An economy with an average growth rate of 10 percent can expect to see its real GDP double in approximately 7 years.

TRUE

113. Real GDP per capita is found by dividing real GDP by the size of the labor force.

FALSE

115. Growth in well-being tends to be understated by growth in real GDP because of increases in leisure time.

TRUE

117. Modern economic growth since the 1820s has widened wealth and income disparities between richer and poorer nations.

TRUE

119. Follower countries achieve high rates of growth by adopting technologies developed by leader countries.

TRUE

120. Strong economic growth since 1960 has allowed nations like Singapore and Ireland to surpass nations such as the United Kingdom and France in real GDP per capita.

TRUE

121. Strong property rights inhibit economic growth by strictly regulating economic behavior.

FALSE

122. Strong patent laws encourage innovation and promote economic growth.

TRUE

123. The intense competition of free trade prevents the investment that generates economic growth.

FALSE

124. A competitive market system promotes growth by providing producers with market signals on which to base investment and production decisions.

TRUE

125. Improvements in technology are considered a demand factor in economic growth.

FALSE

126. Increases in household and business spending are a demand factor in economic growth.

TRUE

131. Between 1953 and 2007, rising labor productivity contributed more to U.S. economic growth than did increases in inputs.

TRUE

132. Real GDP = worker-hours labor productivity.

TRUE

133. Labor productivity = worker-hours/real GDP.

FALSE

137. Because of the recent rise in the average rate of productivity growth, the business cycle is dead.

FALSE

138. Critics of economic growth say studies show that people are not interested in achieving higher standards of living.

FALSE

139. Proponents of economic growth claim that rising living standards can lead to environmental improvements as people can afford to care more about the environment.

TRUE

140. Proponents of economic growth claim that growth leads to greater equality of income in an economy.

FALSE

1. Recurring upswings and downswings in an economy's real GDP over time are called:
A. recessions.
B. business cycles.
C. output yo-yos.
D. total product oscillations.

B. business cycles.

2. In the United States, business cycles have occurred against a backdrop of a long-run trend of:
A. declining unemployment.
B. stagnant productivity growth.
C. rising real GDP.
D. rising inflation.

C. rising real GDP.

3. Most economists agree that the immediate determinant of the volume of output and employment is the:
A. composition of consumer spending.
B. ratio of public goods to private goods production.
C. level of total spending.
D. size of the labor force.

C. level of total spending.

4. As it relates to economic growth, the term long-run trend refers to:
A. the long-run increase in the relative importance of durable goods in the U.S. economy.
B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years.
C. fluctuations in business activity that average 40 months in duration.
D. fluctuations in business activity that occur around Christmas, Easter, and other major holidays.

B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years.

5. In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?
A. military goods
B. capital goods
C. textile products
D. agricultural commodities

B. capital goods

6. The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are:
A. military goods and capital goods.
B. services and nondurable consumer goods.
C. clothing and education.
D. capital goods and durable consumer goods.

D. capital goods and durable consumer goods.

7. During a severe recession, we would expect output to fall the most in:
A. the healthcare industry.
B. the clothing industry.
C. agriculture.
D. the construction industry.

D. the construction industry.

8. The phase of the business cycle in which real GDP declines is called:
A. the peak.
B. an expansion.
C. a recession.
D. the trough.

C. a recession.

9. The phase of the business cycle in which real GDP is at a minimum is called:
A. the peak.
B. a recession.
C. the trough.
D. the underside.

C. the trough.

10. The production of durable goods varies more than the production of nondurable goods because:
A. durables purchases are nonpostponable.
B. durables purchases are postponable.
C. the producers of nondurables have monopoly power.
D. producers of durables are highly competitive.

B. durables purchases are postponable.

11. A recession is defined as a period in which:
A. cost-push inflation is present.
B. nominal domestic output falls.
C. demand-pull inflation is present.
D. real domestic output falls.

D. real domestic output falls.

12. In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?
A. expansion
B. recession
C. peak
D. trough

A. expansion

13. Which of the following statements is true about causes of business cycle fluctuations?
A. Economists all agree that supply shocks are the cause of most business cycle fluctuations.
B. Economists all agree that productivity shocks are the cause of most business cycle changes.
C. Economists all agree that monetary changes are primarily responsible for business cycle fluctuations.
D. There are a wide range of theories as to the underlying causes of business cycle movements.

D. There are a wide range of theories as to the underlying causes of business cycle movements.

14. Which of the following is not seen by economists as an underlying cause of business cycle fluctuations?
A. Unexpected financial bubbles that eventually burst.
B. Shocks to the money supply by the nation's central bank.
C. Supply shocks caused by major innovations.
D. All of these are identified as causes of business cycle changes.

D. All of these are identified as causes of business cycle changes.

15. Most economists agree that the immediate cause of most business cycle variation is:
A. an unexpected change in the productivity of workers.
B. an unexpected change in the level of total spending.
C. the invention of new products.
D. the growth and subsequent bursting of financial bubbles.

B. an unexpected change in the level of total spending.

16. An unexpected increase in total spending will cause an increase in GDP:
A. if prices are sticky.
B. if prices are fully flexible.
C. regardless of whether prices are sticky or fully flexible.
D. only if prices are stuck in the long term.

A. if prices are sticky.

17. What is the primary reason that changes in total spending lead to cyclical changes in output and employment?
A. Government is unable to respond by changing the amount of money in circulation.
B. Changes in total spending cause supply shocks that cause cyclical variation.
C. Prices are sticky in the short run.
D. Prices are flexible in the long run.

C. Prices are sticky in the short run.

18. Innovations such as the microchip and the Internet lead to business cycle variations because:
A. they cause prices to be sticky.
B. significant innovations occur irregularly and unexpectedly.
C. the central bank will often change the money supply in response.
D. they cause prices to be flexible.

B. significant innovations occur irregularly and unexpectedly.

19. Which of the following would most likely move the economy into a recession in the short term?
A. Invention of a new product that most consumers want to buy.
B. Innovations in management that enhance worker productivity.
C. The central bank printing less money than was anticipated.
D. Congress passing a reduction in personal income tax rates.

C. The central bank printing less money than was anticipated.

23. The United States' economy is considered to be at full employment when:
A. about 4-5 percent of the total population is unemployed.
B. 90 percent of the labor force is employed.
C. about 4-5 percent of the labor force is unemployed.
D. 100 percent of the labor force is employed.

C. about 4-5 percent of the labor force is unemployed.

24. In the United States, the rate of unemployment is highest for:
A. white teenagers.
B. African-American teenagers.
C. married women.
D. unmarried women.

B. African-American teenagers.

25. Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kara presently is:
A. cyclically unemployed.
B. structurally unemployed.
C. frictionally unemployed.
D. not a member of the labor force.

C. frictionally unemployed.

26. According to the Bureau of Labor Statistics, to be officially unemployed a person must:
A. be in the labor force.
B. be 21 years of age or older.
C. have lost a job.
D. be waiting to be called back from a layoff.

A. be in the labor force.

27. The natural rate of unemployment is:
A. higher than the full-employment rate of unemployment.
B. lower than the full-employment rate of unemployment.
C. that rate of unemployment occurring when the economy is at its potential output.
D. found by dividing total unemployment by the size of the labor force.

C. that rate of unemployment occurring when the economy is at its potential output.

28. The labor force includes:
A. employed workers and persons who are officially unemployed.
B. employed workers, but excludes persons who are officially unemployed.
C. full-time workers, but excludes part-time workers.
D. permanent employees, but excludes temporary employees.

A. employed workers and persons who are officially unemployed.

29. The unemployment rate of:
A. women greatly exceeds that of men.
B. whites is roughly equal to that of African-Americans.
C. managerial and professional workers exceeds that of construction and extraction workers.
D. teenagers is much higher than that of adults.

D. teenagers is much higher than that of adults.

30. Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is:
A. unemployed.
B. employed.
C. not in the labor force.
D. in the labor force.

C. not in the labor force.

31. If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the:
A. frictional unemployment rate is 5 percent.
B. cyclical unemployment rate and the frictional unemployment rate together are 5 percent.
C. cyclical unemployment rate is 4 percent.
D. natural rate of unemployment will eventually increase.

C. cyclical unemployment rate is 4 percent.

32. Official unemployment statistics:
A. understate unemployment because individuals receiving unemployment compensation are counted as employed.
B. understate unemployment because discouraged workers are not counted as unemployed.
C. include cyclical and structural unemployment, but not frictional unemployment.
D. overstate unemployment because workers who are involuntarily working part time are counted as being employed.

B. understate unemployment because discouraged workers are not counted as unemployed.

33. The presence of discouraged workers:
A. increases the size of the labor force, but does not affect the unemployment rate.
B. reduces the size of the labor force, but does not affect the unemployment rate.
C. may cause the official unemployment rate to understate the true amount of unemployment.
D. may cause the official unemployment rate to overstate the true amount of unemployment.

C. may cause the official unemployment rate to understate the true amount of unemployment.

34. Part-time workers are counted as:
A. unemployed and therefore the official unemployment rate may overstate the level of unemployment.
B. unemployed and therefore the official unemployment rate may understate the level of unemployment.
C. fully employed and therefore the official unemployment rate may overstate the level of unemployment.
D. fully employed and therefore the official unemployment rate may understate the level of unemployment.

D. fully employed and therefore the official unemployment rate may understate the level of unemployment.

35. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is:
A. 3 percent.
B. 6 percent.
C. 7 percent.
D. 53 percent.

B. 6 percent.

36. The natural rate of unemployment is the:
A. unemployment rate experienced at the depth of a depression.
B. full-employment unemployment rate.
C. unemployment rate experienced by the least-skilled workers in the economy.
D. unemployment rate experienced by the most-skilled workers in the economy.

B. full-employment unemployment rate.

37. Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Kyle will be considered as:
A. cyclically unemployed.
B. frictionally unemployed.
C. structurally unemployed.
D. employed.

B. frictionally unemployed.

38. The unemployment rate is the:
A. ratio of unemployed to employed workers.
B. number of employed workers minus the number of workers who are not in the labor force.
C. percentage of the labor force that is unemployed.
D. percentage of the total population that is unemployed.

C. percentage of the labor force that is unemployed.

39. Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would:
A. decline.
B. increase.
C. increase in the short run but eventually decline.
D. be unchanged.

A. decline.

40. Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon where she anticipates that a new job will be available. We can say that Susie is faced with:
A. seasonal unemployment.
B. cyclical unemployment.
C. structural unemployment.
D. frictional unemployment.

C. structural unemployment.

42. Which of the following is correct?
A. The unemployment rates of men and women workers are roughly the same.
B. Unemployment rates for African-American and white workers are approximately the same.
C. Teenagers experience approximately the same unemployment rates as do adults.
D. Laborers are less vulnerable to unemployment than are professional workers.

A. The unemployment rates of men and women workers are roughly the same.

43. A college graduate using the summer following graduation to search for a job would best be classified as:
A. not officially a member of the labor force.
B. a part of structural unemployment.
C. a part of cyclical unemployment.
D. a part of frictional unemployment.

D. a part of frictional unemployment.

44. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. compositional unemployment.

B. structural unemployment.

45. Structural unemployment:
A. is also known as frictional unemployment.
B. is the main component of cyclical unemployment.
C. is said to occur when people are waiting to be called back to previous jobs.
D. may involve a locational mismatch between unemployed workers and job openings.

D. may involve a locational mismatch between unemployed workers and job openings.

46. Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as:
A. structurally unemployed.
B. frictionally unemployed.
C. not in the labor force.
D. employed.

D. employed.

47. Which of the following constitute the types of unemployment occurring at the natural rate of unemployment?
A. Frictional and cyclical unemployment.
B. Structural and frictional unemployment.
C. Cyclical and structural unemployment.
D. Frictional, structural, and cyclical unemployment.

B. Structural and frictional unemployment.

48. Wait unemployment and search unemployment are both types of:
A. cyclical unemployment.
B. hidden unemployment.
C. frictional unemployment.
D. structural unemployment.

C. frictional unemployment.

49. The type of unemployment associated with recessions is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. seasonal unemployment.

C. cyclical unemployment.

50. Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result:
A. the official unemployment rate will fall.
B. the official unemployment rate will rise.
C. the official unemployment rate will remain unchanged.
D. the size of the labor force will increase.

C. the official unemployment rate will remain unchanged.

51. The government agency responsible for collecting and reporting unemployment data is the:
A. Bureau of Labor Statistics.
B. Bureau of Unemployment.
C. Bureau of Economic Analysis.
D. Bureau of Economic Research.

A. Bureau of Labor Statistics.

52. At the economy's natural rate of unemployment:
A. the economy achieves its potential output.
B. there is only a relatively small amount of cyclical unemployment.
C. only frictional unemployment exists.
D. only structural unemployment exists.

A. the economy achieves its potential output.

53. In the depth of the Great Depression, the unemployment rate in the United States was about:
A. 15 percent.
B. 33 percent.
C. 25 percent.
D. 40 percent.

C. 25 percent.

57. Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services?
A. Search unemployment
B. Wait unemployment
C. Cyclical unemployment
D. Frictional unemployment

C. Cyclical unemployment

58. The GDP gap measures the difference between:
A. NDP and GDP.
B. NI and PI.
C. actual GDP and potential GDP.
D. nominal GDP and real GDP.

C. actual GDP and potential GDP.

59. A large negative GDP gap implies:
A. an excess of imports over exports.
B. a low rate of unemployment.
C. a high rate of unemployment.
D. a sharply rising price level.

C. a high rate of unemployment.

60. The aggregate cost of unemployment can be measured by the:
A. amount by which actual GDP exceeds potential GDP.
B. amount by which potential GDP exceeds actual GDP.
C. excess of real GDP over nominal GDP.
D. excess of nominal GDP over real GDP.

B. amount by which potential GDP exceeds actual GDP.

61. If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is:
A. $510 billion.
B. $490 billion.
C. $10 billion.
D. $990 billion.

A. $510 billion.

62. If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is:
A. $360 billion.
B. $660 billion.
C. $320 billion.
D. $20 billion.

C. $320 billion.

63. If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is:
A. $300 billion.
B. $30 billion.
C. $360 billion.
D. $630 billion.

C. $360 billion.

64. If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:
A. $415 billion.
B. $385 billion.
C. $15 billion.
D. $785 billion.

B. $385 billion.

66. The relationship between the size of the negative GDP gap and the unemployment rate is:
A. direct.
B. inverse.
C. undefined.
D. direct during recession, but inverse during expansion.

A. direct.

67. If actual GDP is less than potential GDP:
A. potential GDP will fall.
B. the price level will rise.
C. investment spending will fall.
D. the actual unemployment rate will be higher than the natural unemployment rate.

D. the actual unemployment rate will be higher than the natural unemployment rate.

68. Full-employment output is also called:
A. zero-unemployment output.
B. equilibrium output.
C. potential output.
D. zero-savings output.

C. potential output.

74. Inflation means that:
A. all prices are rising, but at different rates.
B. all prices are rising and at the same rate.
C. prices on average are rising, although some particular prices may be falling.
D. real incomes are rising.

C. prices on average are rising, although some particular prices may be falling.

75. If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:
A. inflation of 4 percent.
B. inflation of 3.33 percent.
C. deflation of 3.33 percent = (100 X 4)/120
D. deflation of 4 percent.

C. deflation of 3.33 percent = (100 X 4)/120

76. The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:
A. 2.8 percent.
B. 3.4 percent.
C. 1.6 percent = (179.9 - 177.1)/177.1
D. 4.1 percent.

C. 1.6 percent = (179.9 - 177.1)/177.1

77. The annual rate of inflation can be found by subtracting:
A. the real income from the nominal income.
B. last year's price index from this year's price index.
C. this year's price index from last year's price index and dividing the difference by this year's price index.
D. last year's price index from this year's price index and dividing the difference by last year's price index.

D. last year's price index from this year's price index and dividing the difference by last year's price index.

78. If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:
A. 11 percent = 33/100 = 0.11
B. 33 percent.
C. 91 percent.
D. 10 percent.

A. 11 percent = 33/100 = 0.11

84. Compared to other industrial nations, inflation rates in the United States are:
A. significantly higher.
B. significantly lower.
C. significantly higher than those in Europe, and significantly lower than those in Japan.
D. neither significantly higher nor significantly lower.

D. neither significantly higher nor significantly lower.

85. Demand-pull inflation:
A. occurs when prices of resources rise, pushing up costs and the price level.
B. occurs when total spending exceeds the economy's ability to provide output at the existing price level.
C. occurs only when the economy has reached its absolute production capacity.
D. is also called cost-push inflation.

B. occurs when total spending exceeds the economy's ability to provide output at the existing price level.

86. Demand-pull inflation:
A. occurs when total spending in the economy is excessive.
B. is measured differently than cost-push inflation.
C. can be present even during an economic depression.
D. is also called "hyperinflation."

A. occurs when total spending in the economy is excessive.

87. The phrase "too much money chasing too few goods" best describes:
A. the GDP gap.
B. demand-pull inflation.
C. the inflation premium.
D. cost-push inflation.

B. demand-pull inflation.

88. Unlike demand-pull inflation, cost-push inflation:
A. is self-limiting.
B. drives up the price level.
C. increases nominal income.
D. increases real income.

A. is self-limiting.

89. Inflation initiated by increases in wages or other resource prices is labeled:
A. demand-pull inflation.
B. demand-push inflation.
C. cost-push inflation.
D. cost-pull inflation.

C. cost-push inflation.

91. Cost-push inflation may be caused by:
A. a decline in per unit production costs.
B. a decrease in wage rates.
C. a negative supply shock.
D. an increase in resource availability.

C. a negative supply shock.

92. Rising per-unit production costs are most directly associated with:
A. frictional unemployment.
B. structural unemployment.
C. demand-pull inflation.
D. cost-push inflation.

D. cost-push inflation.

93. Which of the following would most likely occur during the expansionary phase of the business cycle?
A. Demand-pull inflation
B. Cost-push inflation
C. Structural inflation
D. Frictional inflation

A. Demand-pull inflation

99. Suppose that a person's nominal income rises by 5 percent and the price level rises from 125 to 130. The person's real income will:
A. fall by about 1 percent.
B. remain constant.
C. rise by about 4 percent.
D. rise by about 1 percent = 5/125 = 4%

D. rise by about 1 percent = 5/125 = 4%

103. Cost-push inflation:
A. reduces real output.
B. increases real output.
C. reduces the unemployment rate.
D. raises the natural rate of unemployment.

A. reduces real output.

104. Cost-of-living adjustment clauses (COLAs):
A. invalidate the "rule of 70."
B. apply only to demand-pull inflation.
C. increase the gap between nominal and real income.
D. tie wage increases to changes in the price level.

D. tie wage increases to changes in the price level.

105. During a period of hyperinflation:
A. creditors gain because their loans are repaid with dollars of higher value.
B. people tend to hold goods rather than money.
C. income is redistributed away from borrowers.
D. the real value of the national currency rises.

B. people tend to hold goods rather than money.

106. Inflation is undesirable because it:
A. arbitrarily redistributes real income and wealth.
B. invariably leads to hyperinflation.
C. usually is accompanied by declining real GDP.
D. reduces everyone's standard of living.

A. arbitrarily redistributes real income and wealth.

107. Who is least likely to be hurt by unanticipated inflation?
A. a disabled laborer who is living off accumulated savings
B. an owner of a small business
C. a secretary
D. a pensioned steelworker

B. an owner of a small business

108. A lender need not be penalized by inflation if the:
A. long-term rate of inflation is less than the short-term rate of inflation.
B. short-term rate of inflation is less than the long-term rate of inflation.
C. lender correctly anticipates inflation and increases the nominal interest rate accordingly.
D. inflation is unanticipated by both borrower and lender.

C. lender correctly anticipates inflation and increases the nominal interest rate accordingly.

110. Inflation affects:
A. both the level and the distribution of income.
B. neither the level nor the distribution of income.
C. the distribution, but not the level, of income.
D. the level, but not the distribution, of income.

A. both the level and the distribution of income.

111. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:
A. 8 percent.
B. 5 percent.
C. 3 percent.
D. 2 percent.

C. 3 percent.

112. If both the real interest rate and the nominal interest rate are 3 percent, then the:
A. inflation premium is zero.
B. real GDP must exceed the nominal GDP.
C. nominal GDP must exceed real GDP.
D. inflation premium also is 3 percent.

A. inflation premium is zero.

113. Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:
A. 6 percent.
B. 8 percent.
C. 2 percent.
D. 3 percent.

D. 3 percent.

114. Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:
A. 2 percent.
B. 3 percent.
C. 5 percent.
D. 7 percent.

D. 7 percent.

117. (Last Word) Declines in stock prices measured by the Dow Jones average:
A. are a major cause of recessions.
B. usually reduce saving and increase consumption spending.
C. usually increase investment and reduce net exports.
D. sometimes precede recessions; sometimes do not.

D. sometimes precede recessions; sometimes do not.

118. (Last Word) Changes in stock market prices:
A. do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy.
B. greatly impact the macroeconomy but used alone are not reliable predictors of the future health of the economy.
C. greatly impact the macroeconomy and used alone are reliable predictors of the future health of the economy.
D. do not greatly impact the macroeconomy but used alone are reliable predictors of the future health of the economy.

A. do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy.

119. (Last Word) A burst stock market bubble might adversely affect the economy by:
A. causing rapid inflation.
B. greatly reducing net exports.
C. causing a severe negative wealth effect, leading to pessimism about the economy's future.
D. raising interest rates.

C. causing a severe negative wealth effect, leading to pessimism about the economy's future.

120. The production of durable goods is more stable than the production of nondurables over the business cycle.

FALSE

121. The business cycle is so named because upswings and downswings in business activity are predictably equal in terms of duration and intensity.

FALSE

122. People who work part time, but desire to work full time, are considered to be officially unemployed.

FALSE

123. The natural rate of unemployment in the United States is about 4 to 5 percent.

TRUE

124. An annual rate of inflation of 7 percent will double the price level in about 15 years.
FALSE

FALSE

125. During the past ten years the annual rate of inflation in the United States has averaged less than 1 percent.
FALSE

FALSE

126. If the price level doubled in a 23-year period, we can conclude that the average annual rate of inflation over that period was about 3 percent.

TRUE

127. Unanticipated inflation benefits debtors at the expense of creditors.

TRUE

128. Unanticipated inflation benefits some groups in the economy.

TRUE

129. If the nominal interest rate is 8 percent and the real interest rate is 5 percent, then the inflation premium is 13 percent.
FALSE

FALSE

1. The most important determinant of consumer spending is:
A. the level of household borrowing.
B. consumer expectations.
C. the stock of wealth.
D. the level of income.

D. the level of income.

2. The most important determinant of consumption and saving is the:
A. level of bank credit.
B. level of income.
C. interest rate.
D. price level.

B. level of income.

9. The consumption forecast directly relates:
A. consumption to the level of disposable income.
B. saving to the level of disposable income.
C. disposable income to domestic income.
D. consumption to saving.

A. consumption to the level of disposable income.

10. A decline in disposable income:
A. increases consumption by moving upward along a specific consumption schedule.
B. decreases consumption because it shifts the consumption schedule downward.
C. decreases consumption by moving downward along a specific consumption schedule.
D. increases consumption because it shifts the consumption schedule upward.

C. decreases consumption by moving downward along a specific consumption schedule.

12. The consumption forecast shows:
A. a direct relationship between aggregate consumption and accumulated wealth.
B. a direct relationship between aggregate consumption and aggregate income.
C. an inverse relationship between aggregate consumption and accumulated financial wealth.
D. an inverse relationship between aggregate consumption and the price level.

B. a direct relationship between aggregate consumption and aggregate income.

15. The consumption forecast is drawn on the assumption that as income increases, consumption will:
A. be unaffected.
B. increase absolutely, but remain constant as a percentage of income.
C. increase absolutely, but decline as a percentage of income.
D. increase both absolutely and as a percentage of income.

C. increase absolutely, but decline as a percentage of income.

20. As disposable income increases, consumption:
A. and saving both increase.
B. and saving both decrease.
C. decreases and saving increases.
D. increases and saving decreases.

A. and saving both increase.

21. The relationship between consumption and disposable income is such that:
A. an inverse and stable relationship exists between consumption and income.
B. a direct, but very volatile, relationship exists between consumption and income.
C. a direct and relatively stable relationship exists between consumption and income.
D. the two are usually equal.

C. a direct and relatively stable relationship exists between consumption and income.

24. In contrast to investment, consumption is:
A. relatively unstable.
B. relatively stable.
C. measurable.
D. unmeasurable.

B. relatively stable.

27. Which one of the following will cause a movement down along an economy's consumption forecast?
A. an increase in stock prices
B. a decrease in stock prices
C. an increase in consumer indebtedness
D. a decrease in disposable income

D. a decrease in disposable income

38. Dissaving means:
A. the same thing as disinvesting.
B. that households are spending more than their current incomes.
C. that saving and investment are equal.
D. that disposable income is less than zero.

B. that households are spending more than their current incomes.

39. Dissaving occurs where:
A. income exceeds consumption.
B. saving exceeds consumption.
C. consumption exceeds income.
D. saving exceeds income.

C. consumption exceeds income.

41. The saving forecast is drawn on the assumption that as income increases:
A. saving will decline absolutely and as a percentage of income.
B. saving will increase absolutely, but remain constant as a percentage of income.
C. saving will increase absolutely, but decline as a percentage of income.
D. saving will increase absolutely and as a percentage of income.

D. saving will increase absolutely and as a percentage of income.

43. The saving schedule is such that as aggregate income increases by a certain amount saving:
A. increases by the same amount as the increase in income.
B. does not change.
C. increases, but by a smaller amount.
D. increases by an even larger amount.

C. increases, but by a smaller amount.

46. If the marginal propensity to consume is .9, then the marginal propensity to save must be:
A. 1.
B. .1.
C. 1.1.
D. .9.

B. .1.

47. The greater is the marginal propensity to consume, the:
A. smaller is the marginal propensity to save.
B. higher is the interest rate.
C. smaller is the average propensity to consume.
D. lower is the price level.

A. smaller is the marginal propensity to save.

49. Which one of the following will cause a movement up along an economy's saving schedule?
A. an increase in household borrowing
B. an increase in disposable income
C. an increase in stock prices
D. an increase in interest rates

B. an increase in disposable income

50. In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
A. Keynes effect.
B. interest-rate effect.
C. wealth effect.
D. multiplier effect.

C. wealth effect.

57. Which of the following will not tend to shift the consumption forecast upward?
A. a currently small stock of durable goods in the possession of consumers
B. the expectation of a future decline in the consumer price index
C. a currently low level of household debt
D. the expectation of future shortages of essential consumer goods

B. the expectation of a future decline in the consumer price index

58. If the consumption forecast shifts upward and the shift was not caused by a tax change, the saving forecast:
A. will not shift.
B. may shift either upward or downward.
C. will shift downward.
D. will also shift upward.

C. will shift downward.

60. When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
A. both the consumption and saving schedules downward.
B. both the consumption and saving schedules upward.
C. the consumption schedule upward and the saving schedule downward.
D. the consumption schedule downward and the saving schedule upward.

A. both the consumption and saving schedules downward.

61. If for some reason households become increasingly thrifty, we could show this by:
A. a downshift of the saving schedule.
B. an upward shift of the consumption schedule.
C. an upward shift of the saving schedule.
D. a movement down along a stable consumption function.

C. an upward shift of the saving schedule.

63. Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of:
A. an increase in disposable income.
B. an increase in household wealth.
C. an increase in personal taxes.
D. the expectation of a recession.

C. an increase in personal taxes.

99. The investment demand curve portrays an inverse (negative) relationship between:
A. investment and real GDP.
B. the real interest rate and investment.
C. the nominal interest rate and investment.
D. the price level and investment.

B. the real interest rate and investment.

105. The relationship between the real interest rate and investment can be shown by the:
A. investment demand schedule.
B. consumption of fixed capital schedule.
C. saving schedule.
D. aggregate supply curve.

A. investment demand schedule.

106. Given the expected rate of return on all possible investment opportunities in the economy:
A. an increase in the real rate of interest will reduce the level of investment.
B. a decrease in the real rate of interest will reduce the level of investment.
C. a change in the real interest rate will have no impact on the level of investment.
D. an increase in the real interest rate will increase the level of investment.

A. an increase in the real rate of interest will reduce the level of investment.

107. A decline in the real interest rate will:
A. increase the amount of investment spending.
B. shift the investment schedule downward.
C. shift the investment demand curve to the right.
D. shift the investment demand curve to the left.

A. increase the amount of investment spending.

108. The immediate determinants of investment spending are the:
A. expected rate of return on capital goods and the real interest rate.
B. level of saving and the real interest rate.
C. marginal propensity to consume and the real interest rate.
D. interest rate and the expected price level.

A. expected rate of return on capital goods and the real interest rate.

112. If business taxes are reduced and the real interest rate increases:
A. consumption and saving will necessarily increase.
B. the level of investment spending might either increase or decrease.
C. the level of investment spending will necessarily increase.
D. the level of investment spending will necessarily decrease.

B. the level of investment spending might either increase or decrease.

116. Other things equal, if the real interest rate falls and business taxes rise:
A. investment will rise until it is equal to saving.
B. we will be uncertain as to the resulting change in investment.
C. we can be certain that investment will rise.
D. we can be certain that investment will fall.

B. we will be uncertain as to the resulting change in investment.

117. The investment demand curve will shift to the higher level as a result of:
A. an increase in the excess production capacity available in industry.
B. an increase in business taxes.
C. technological progress.
D. an increase in the acquisition and maintenance cost of capital goods.

C. technological progress.

118. The investment demand curve will shift to the lower level as a result of:
A. an increase in the excess production capacity available in industry.
B. a decrease in business taxes.
C. increased business optimism with respect to future economic conditions.
D. a decrease in labor costs.

A. an increase in the excess production capacity available in industry.

121. The real interest rate is:
A. the percentage increase in money that the lender receives on a loan.
B. the percentage increase in purchasing power that the lender receives on a loan.
C. also called the after-tax interest rate.
D. usually higher than the nominal interest rate.

B. the percentage increase in purchasing power that the lender receives on a loan.

122. When we draw an investment demand curve we can hold constant all of the following except:
A. the expected rate of return on the investment.
B. business taxes.
C. the interest rate.
D. the present stock of capital goods.

C. the interest rate.

123. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:
A. 18 percent.
B. 24 percent.
C. 12 percent.
D. 6 percent.

C. 12 percent.

124. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
A. 2 percent.
B. zero percent.
C. 10 percent.
D. 22 percent.

D. 22 percent.

125. A high rate of inflation is likely to cause a:
A. high nominal interest rate.
B. low nominal interest rate.
C. low rate of growth of nominal GDP.
D. decrease in nominal wages.

A. high nominal interest rate.

126. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:
A. more investment will be forthcoming when i exceeds r.
B. less investment will be forthcoming when r rises.
C. r will fall as more investment is undertaken.
D. r will exceed i at all possible levels of investment.

C. r will fall as more investment is undertaken.

127. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:
A. investment will take place until i and r are equal.
B. investment will take place until r exceeds i by the greatest amount.
C. r will rise as more investment is undertaken.
D. i will fall as more investment is undertaken.

A. investment will take place until i and r are equal.

133. Which of the following would shift the investment demand curve for the worst?
A. a lower interest rate
B. lower expected rates of return on investment
C. a higher interest rate
D. higher expected rates of return on investment

B. lower expected rates of return on investment

134. Which of the following would increase investment?
A. a lower interest rate
B. a higher interest rate
C. lower expected returns on investment
D. higher expected returns on investment

A. a lower interest rate

135. In annual percentage terms, investment spending in the United States is:
A. less variable than real GDP.
B. less variable than consumption spending.
C. less variable than the price level.
D. more variable than real GDP.

D. more variable than real GDP.

136. Investment spending in the United States tends to be unstable because:
A. expected profits are highly variable.
B. capital goods are durable.
C. innovation occurs at an irregular pace.
D. all of these contribute to the instability.

D. all of these contribute to the instability.

137. Investment spending in the United States tends to be unstable because:
A. profits are highly variable.
B. the price level fluctuates rapidly.
C. investment spending is affected by interest rates.
D. capital wears out quickly and must be replaced often.

A. profits are highly variable.

138. Capital goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending.
A. nondurable; instability
B. nondurable; stability
C. durable; instability
D. durable; stability

C. durable; instability

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MAcro 2

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1. Economic growth is best defined as an increase in:
A. either real GDP or real GDP per capita.
B. nominal GDP.
C. total consumption expenditures.
D. wealth in the economy.

A. either real GDP or real GDP per capita.

2. Real GDP per capita is found by:
A. adding real GDP and population.
B. subtracting population from real GDP.
C. dividing real GDP by population.
D. dividing population by real GDP.

C. dividing real GDP by population.

3. Real GDP per capita:
A. cannot grow more rapidly than real GDP.
B. cannot grow more slowly than real GDP.
C. necessarily grows more rapidly than real GDP.
D. can grow either more slowly or more rapidly than real GDP.

D. can grow either more slowly or more rapidly than real GDP.

4. Which of the following best measures improvements in the standard of living of a nation?
A. growth of nominal GDP
B. growth of real GDP
C. growth of real GDP per capita
D. growth of national income

C. growth of real GDP per capita

5. If a nation’s real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, its real GDP per capita will:
A. remain constant.
B. fall by 6 percent.
C. rise by 6 percent.
D. fall by 12 percent.

A. remain constant.

6. For a nation’s real GDP per capita to rise during a year:
A. consumption spending must increase.
B. real GDP must increase more rapidly than population.
C. population must increase more rapidly than real GDP.
D. investment spending must increase.

B. real GDP must increase more rapidly than population.

7. Growth is advantageous to a nation because it:
A. promotes faster population growth.
B. lessens the burden of scarcity.
C. eliminates the economizing problem.
D. slows the growth of wants.

B. lessens the burden of scarcity.

8. For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic growth would be changes in:
A. total nominal output.
B. total real output.
C. per capita output.
D. per family output.

B. total real output.

21. Under what circumstances do rates of economic growth understate the growth of economic well-being?
A. Economic growth has occurred because of increased length of the workweek.
B. Product quality has improved.
C. Air quality has declined as real GDP has increased.
D. Population has grown faster than real output.

B. Product quality has improved.

22. Which of the following statements is most accurate about modern economic growth?
A. Economic historians mark modern economic growth as beginning around A.D. 1500.
B. Modern economic growth is characterized by sustained and ongoing increases in living standards.
C. Modern economic growth has virtually eliminated business cycle fluctuations.
D. Modern economic growth has been distributed more or less equally across nations.

B. Modern economic growth is characterized by sustained and ongoing increases in living standards.

23. Countries that have experienced modern economic growth have also tended to:
A. adopt feudalistic institutions.
B. restrict women and minorities from holding certain economic and political positions.
C. move toward more democratic forms of government.
D. have less leisure time for sport and artistic activities.

C. move toward more democratic forms of government.

24. The Industrial Revolution and modern economic growth resulted in:
A. the average human lifespan more than doubling.
B. a major population shift from urban to rural areas.
C. increased production by local craftsmen.
D. all of these.

A. the average human lifespan more than doubling.

30. As of 1998, living standards in the United States were nearly ______ times higher than those in Africa.
A. 3
B. 8
C. 14
D. 20

D. 20

32. Real GDP per capita in the United States (as of 2007) exceeds that of France primarily because:
A. the United States had higher annual rates of growth than France from 1960 through 2007.
B. the United States has a much larger population than France.
C. the United States has a higher percentage of the working-age population in the labor force and because U.S. employees average about 20 percent more hours worked per year.
D. European Union rules severely limit France’s access to technologies developed outside the region.

C. the United States has a higher percentage of the working-age population in the labor force and because U.S. employees average about 20 percent more hours worked per year.

33. Based on the annual number of hours worked per capita, labor supply in the United States exceeds that of France by about _______ percent.
A. 20
B. 40
C. 51
D. 62

B. 40

34. Strong property rights are important for modern economic growth because:
A. they allow governments to extract the gains from private citizens’ investments.
B. people are more likely to invest if they don’t fear that others can take their returns on investment without compensation.
C. they ensure an equitable distribution of income.
D. business cycle fluctuations will be smaller and less likely to disrupt investment patterns.

B. people are more likely to invest if they don’t fear that others can take their returns on investment without compensation.

35. Which of the following institutional structures is most likely to promote growth?
A. A well-enforced system of patents and copyrights.
B. A tightly regulated market system.
C. A system of tariffs and other trade barriers to protect domestic companies.
D. All of these.

A. A well-enforced system of patents and copyrights.

36. Which of the following institutional arrangements is most likely to promote growth?
A. Patents and copyrights that expire quickly and are loosely enforced.
B. Strong government control over resource allocation decisions.
C. Unrestricted trade between nations.
D. All of these.

C. Unrestricted trade between nations.

37. A competitive market system:
A. encourages growth by allowing producers to make profitable investment decisions based on market signals.
B. encourages growth by ensuring that everyone in society will receive a decent standard of living.
C. discourages growth because firms busy competing have no time to innovate or invest.
D. discourages growth unless government protects domestic firms from foreign competition.

A. encourages growth by allowing producers to make profitable investment decisions based on market signals.

38. Free trade:
A. discourages growth by increasing competitive pressures on domestic firms.
B. encourages growth by effectively eliminating all patent and copyright barriers to growth.
C. discourages growth compared to situations where the government strongly controls foreign trade.
D. encourages growth by promoting the rapid spread of new inventions and innovations.

D. encourages growth by promoting the rapid spread of new inventions and innovations.

45. The achievement of full employment through time will:
A. diminish labor productivity.
B. reduce the level of investment as a percentage of GDP.
C. increase the realized rate of economic growth.
D. have no impact on the rate of economic growth.

C. increase the realized rate of economic growth.

46. Economic growth can be portrayed as:
A. an outward shift of the production possibilities curve.
B. an inward shift of the production possibilities curve.
C. a movement from a point on to a point inside a production possibilities curve.
D. a movement from one point to another point on a fixed production possibilities curve.

A. an outward shift of the production possibilities curve.

49. Suppose that an economy’s labor productivity fell by 3 percent and its total worker-hours remained constant between year 1 and year 2. We could conclude that this economy’s:
A. real GDP declined.
B. capital stock increased.
C. production possibilities curve shifted outward.
D. actual production moved from one point to another on a fixed production possibilities curve.

A. real GDP declined.

57. Labor productivity is measured by:
A. the ratio of capital to labor.
B. real output per worker hour.
C. real output per capita.
D. the ratio of worker hours to real GDP.

B. real output per worker hour.

58. Labor productivity is defined as:
A. total output/worker-hours.
B. nominal GDP minus real GDP.
C. the ratio of real capital to worker-hours.
D. the annual increase in nominal GDP per worker.

A. total output/worker-hours.

60. If the number of worker-hours in an economy is 100 and its labor productivity is $5 of output per worker-hour, the economy’s real GDP:
A. is $20.
B. is $500.
C. is $5000.
D. cannot be calculated.

B. is $500.

61. Suppose total output (real GDP) is $4000 and labor productivity is $8. We can conclude that:
A. real GDP per capita must be $500.
B. the price-level index must be greater than 100.
C. nominal GDP must be $500.
D. the number of worker-hours must be 500.

D. the number of worker-hours must be 500.

62. Suppose total output (real GDP) is $10,000 and worker-hours are 20,000. We can conclude that:
A. real GDP per capita must be $200,000.
B. the price-level index must be less than 100.
C. labor productivity must be $0.5.
D. nominal GDP must be between $10,000 and $20,000.

C. labor productivity must be $0.5.

63. The percentage of the working-age population in the labor force (= employed + officially unemployed) is called the:
A. labor force participation rate.
B. employment-population ratio.
C. work-activity rate.
D. work-nonwork ratio.

A. labor force participation rate.

64. Other things equal, which of the following would decrease the rate of economic growth, as measured by changes in real GDP?
A. An increase in the educational attainment of the labor force
B. A permanent decrease in frictional unemployment
C. An increase in the amount of capital per worker
D. A decrease in the labor force participation rate

D. A decrease in the labor force participation rate

65. Other things equal, which of the following would increase the rate of economic growth, as measured by changes in real GDP?
A. A decline in the average length of the work week.
B. A decrease in the labor force participation rate.
C. An increase in the size of the working age population.
D. A decline in the amount of capital per worker.

C. An increase in the size of the working age population.

66. Which of the following would not be expected to increase labor productivity?
A. technological advance
B. the acquisition of more education and training by the labor force
C. an increase in the size of the labor force
D. the realization of economies of scale

C. an increase in the size of the labor force

68. Empirical studies suggest that:
A. labor productivity has declined throughout U.S. history.
B. technological advances account for about 40 percent of U.S. productivity growth.
C. the achieving of economies of scale is the most important factor in U.S. economic growth.
D. all U.S. economic growth from between 2001 and 2007 can be attributed to increases in the quantity of labor.

B. technological advances account for about 40 percent of U.S. productivity growth.

69. Between 2009 and 2020, productivity growth is expected to account for about ________ percent of the growth of real GDP in the United States.
A. 23
B. 40
C. 75
D. 92

D. 92

70. The largest contributor to increases in the productivity of American labor is:
A. the reallocation of labor from agriculture to manufacturing.
B. improvements in labor quality.
C. increases in the quantity of capital.
D. technological advance.

D. technological advance.

71. Which of the following statements is correct?
A. The U.S. population has increased more rapidly than real GDP in recent decades.
B. Improved education and training of labor is the most important source of U.S. productivity growth.
C. The average American factory worker has about 16 years of formal education.
D. The amount of real capital used per worker has increased historically in the United States.

D. The amount of real capital used per worker has increased historically in the United States.

72. The historical reallocation of labor from agriculture to manufacturing in the United States has:
A. been inflationary.
B. had no effect on the average productivity of labor.
C. increased the average productivity of labor.
D. reduced the average productivity of labor.

C. increased the average productivity of labor.

73. More than half the growth of real GDP in the United States is caused by:
A. a falling price level.
B. the reallocation of labor from manufacturing to agriculture.
C. increases in the productivity of labor.
D. the use of fewer inputs of labor.

C. increases in the productivity of labor.

74. Which of the following is the largest contributor to the growth of labor productivity in the United States?
A. technological advance
B. education and training of labor
C. economies of scale
D. improved resource allocation

A. technological advance

75. A nation’s infrastructure refers to:
A. its ability to realize economies of scale.
B. its stock of technological knowledge.
C. public capital goods such as highways and sanitation systems.
D. the productivity of its labor force.

C. public capital goods such as highways and sanitation systems.

76. Economies of scale refer to:
A. the idea that proprietorships are less bureaucratic and therefore more efficient than corporations.
B. public investments in highways, schools, utilities, and such.
C. the fact that large producers may be able to use more efficient technologies than smaller producers.
D. the reallocation of labor from less-productive to more-productive uses.

C. the fact that large producers may be able to use more efficient technologies than smaller producers.

77. Other things equal, if a full-employment economy reallocated a substantial quantity of its resources to capital goods, we would expect:
A. present consumption to rise.
B. future consumption to fall.
C. a lower rate of growth of real GDP.
D. labor productivity to rise.

D. labor productivity to rise.

79. Human capital refers to:
A. the skills and knowledge that enable a worker to be productive.
B. machinery used by labor in production.
C. the accumulated financial wealth of households.
D. physical capital owned by households rather than businesses.

A. the skills and knowledge that enable a worker to be productive.

80. What percentage of the U.S. adult population has at least a high school education (as of 2009)?
A. 29 percent
B. 41 percent
C. 87 percent
D. 95 percent

C. 87 percent

81. What percentage of the U.S. adult population has a college or post-college education (as of 2009)?
A. 8 percent
B. 29 percent
C. 41 percent
D. 87 percent

B. 29 percent

86. The annual growth of U.S. labor productivity:
A. was greater between 1973 and 1995 than between 1995 and 2009.
B. was greater between 1995 and 2009 than between 1973 and 1995.
C. was negative in the late 1990s.
D. averaged nearly 5 percent in the 1990s.

B. was greater between 1995 and 2009 than between 1973 and 1995.

87. The period in the U.S. economy from 1995 to 2009 is characterized by:
A. a higher trend rate of saving.
B. a higher natural rate of unemployment.
C. a higher trend rate of productivity growth.
D. the end of the business cycle.

C. a higher trend rate of productivity growth.

88. Increases in the value of a product to each user, including existing users, as the total number of users rises are called:
A. information cascades.
B. learning effects.
C. network effects.
D. scale economies.

C. network effects.

89. Network effects are:
A. increases in the value of a product to each user, including existing users, as the total number of users rises.
B. reductions in per unit production cost as firms learn by doing.
C. increases in demand resulting from products being mentioned positively in a television program.
D. the change in real GDP resulting from a change in investment or government spending.

A. increases in the value of a product to each user, including existing users, as the total number of users rises.

94. Economists who believe that the recent rise in the average rate of productivity growth may be long-lasting claim that the above-normal economic growth in the United States between 1995 and 2009 was caused by:
A. increases in the rate of personal saving.
B. increased entrepreneurial activity, application of information technology, and global competition.
C. rising Federal budget surpluses that reduced real interest rates.
D. expansionary monetary policy.

B. increased entrepreneurial activity, application of information technology, and global competition.

95. Economists who believe that the recent rise in the average rate of productivity growth will be long lasting say that:
A. the United States is entering an era of high structural unemployment due to rapid technological change.
B. technological advance creates its own supply, which in turn creates its own demand.
C. innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy’s potential economic growth rate.
D. technological change will require more central planning and government regulation.

C. innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy’s potential economic growth rate.

96. Between 1995 and 2009, the U.S. productivity rate:
A. was slightly negative, mainly because of record levels of employment growth.
B. grew substantially compared to prior years, leading some economists to predict a long-lasting resurgence of productivity growth.
C. slowed considerably relative to the high rates between 1990 and 1995.
D. reached record low levels for the United States’ economy, leading some economists to talk of a long-term trend of stagnation.

B. grew substantially compared to prior years, leading some economists to predict a long-lasting resurgence of productivity growth.

99. Critics of economic growth:
A. contend that growth and industrialization reduce pollution.
B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.
C. point out that growth results in greater economic security for workers.
D. say that its benefits accrue nearly exclusively to white males.

B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.

107. (Last Word) Over the past twenty-five years, China has averaged annual growth rates of nearly:
A. 5 percent.
B. 9 percent.
C. 12 percent.
D. 15 percent.

B. 9 percent.

108. (Last Word) Growth of real per capita income and China has largely resulted from:
A. increased use of technology and improved technology.
B. population decline.
C. reduced unemployment rates.
D. its trade deficit with the United States.

A. increased use of technology and improved technology.

109. (Last Word) Which of the following problems has not accompanied China’s rapid economic growth over the past twenty-five years?
A. High rates of inflation.
B. Structural unemployment of displaced agricultural workers.
C. Uneven economic development.
D. Falling per capita income.

D. Falling per capita income.

111. An economy with an average growth rate of 10 percent can expect to see its real GDP double in approximately 7 years.

TRUE

113. Real GDP per capita is found by dividing real GDP by the size of the labor force.

FALSE

115. Growth in well-being tends to be understated by growth in real GDP because of increases in leisure time.

TRUE

117. Modern economic growth since the 1820s has widened wealth and income disparities between richer and poorer nations.

TRUE

119. Follower countries achieve high rates of growth by adopting technologies developed by leader countries.

TRUE

120. Strong economic growth since 1960 has allowed nations like Singapore and Ireland to surpass nations such as the United Kingdom and France in real GDP per capita.

TRUE

121. Strong property rights inhibit economic growth by strictly regulating economic behavior.

FALSE

122. Strong patent laws encourage innovation and promote economic growth.

TRUE

123. The intense competition of free trade prevents the investment that generates economic growth.

FALSE

124. A competitive market system promotes growth by providing producers with market signals on which to base investment and production decisions.

TRUE

125. Improvements in technology are considered a demand factor in economic growth.

FALSE

126. Increases in household and business spending are a demand factor in economic growth.

TRUE

131. Between 1953 and 2007, rising labor productivity contributed more to U.S. economic growth than did increases in inputs.

TRUE

132. Real GDP = worker-hours labor productivity.

TRUE

133. Labor productivity = worker-hours/real GDP.

FALSE

137. Because of the recent rise in the average rate of productivity growth, the business cycle is dead.

FALSE

138. Critics of economic growth say studies show that people are not interested in achieving higher standards of living.

FALSE

139. Proponents of economic growth claim that rising living standards can lead to environmental improvements as people can afford to care more about the environment.

TRUE

140. Proponents of economic growth claim that growth leads to greater equality of income in an economy.

FALSE

1. Recurring upswings and downswings in an economy’s real GDP over time are called:
A. recessions.
B. business cycles.
C. output yo-yos.
D. total product oscillations.

B. business cycles.

2. In the United States, business cycles have occurred against a backdrop of a long-run trend of:
A. declining unemployment.
B. stagnant productivity growth.
C. rising real GDP.
D. rising inflation.

C. rising real GDP.

3. Most economists agree that the immediate determinant of the volume of output and employment is the:
A. composition of consumer spending.
B. ratio of public goods to private goods production.
C. level of total spending.
D. size of the labor force.

C. level of total spending.

4. As it relates to economic growth, the term long-run trend refers to:
A. the long-run increase in the relative importance of durable goods in the U.S. economy.
B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years.
C. fluctuations in business activity that average 40 months in duration.
D. fluctuations in business activity that occur around Christmas, Easter, and other major holidays.

B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years.

5. In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?
A. military goods
B. capital goods
C. textile products
D. agricultural commodities

B. capital goods

6. The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are:
A. military goods and capital goods.
B. services and nondurable consumer goods.
C. clothing and education.
D. capital goods and durable consumer goods.

D. capital goods and durable consumer goods.

7. During a severe recession, we would expect output to fall the most in:
A. the healthcare industry.
B. the clothing industry.
C. agriculture.
D. the construction industry.

D. the construction industry.

8. The phase of the business cycle in which real GDP declines is called:
A. the peak.
B. an expansion.
C. a recession.
D. the trough.

C. a recession.

9. The phase of the business cycle in which real GDP is at a minimum is called:
A. the peak.
B. a recession.
C. the trough.
D. the underside.

C. the trough.

10. The production of durable goods varies more than the production of nondurable goods because:
A. durables purchases are nonpostponable.
B. durables purchases are postponable.
C. the producers of nondurables have monopoly power.
D. producers of durables are highly competitive.

B. durables purchases are postponable.

11. A recession is defined as a period in which:
A. cost-push inflation is present.
B. nominal domestic output falls.
C. demand-pull inflation is present.
D. real domestic output falls.

D. real domestic output falls.

12. In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?
A. expansion
B. recession
C. peak
D. trough

A. expansion

13. Which of the following statements is true about causes of business cycle fluctuations?
A. Economists all agree that supply shocks are the cause of most business cycle fluctuations.
B. Economists all agree that productivity shocks are the cause of most business cycle changes.
C. Economists all agree that monetary changes are primarily responsible for business cycle fluctuations.
D. There are a wide range of theories as to the underlying causes of business cycle movements.

D. There are a wide range of theories as to the underlying causes of business cycle movements.

14. Which of the following is not seen by economists as an underlying cause of business cycle fluctuations?
A. Unexpected financial bubbles that eventually burst.
B. Shocks to the money supply by the nation’s central bank.
C. Supply shocks caused by major innovations.
D. All of these are identified as causes of business cycle changes.

D. All of these are identified as causes of business cycle changes.

15. Most economists agree that the immediate cause of most business cycle variation is:
A. an unexpected change in the productivity of workers.
B. an unexpected change in the level of total spending.
C. the invention of new products.
D. the growth and subsequent bursting of financial bubbles.

B. an unexpected change in the level of total spending.

16. An unexpected increase in total spending will cause an increase in GDP:
A. if prices are sticky.
B. if prices are fully flexible.
C. regardless of whether prices are sticky or fully flexible.
D. only if prices are stuck in the long term.

A. if prices are sticky.

17. What is the primary reason that changes in total spending lead to cyclical changes in output and employment?
A. Government is unable to respond by changing the amount of money in circulation.
B. Changes in total spending cause supply shocks that cause cyclical variation.
C. Prices are sticky in the short run.
D. Prices are flexible in the long run.

C. Prices are sticky in the short run.

18. Innovations such as the microchip and the Internet lead to business cycle variations because:
A. they cause prices to be sticky.
B. significant innovations occur irregularly and unexpectedly.
C. the central bank will often change the money supply in response.
D. they cause prices to be flexible.

B. significant innovations occur irregularly and unexpectedly.

19. Which of the following would most likely move the economy into a recession in the short term?
A. Invention of a new product that most consumers want to buy.
B. Innovations in management that enhance worker productivity.
C. The central bank printing less money than was anticipated.
D. Congress passing a reduction in personal income tax rates.

C. The central bank printing less money than was anticipated.

23. The United States’ economy is considered to be at full employment when:
A. about 4-5 percent of the total population is unemployed.
B. 90 percent of the labor force is employed.
C. about 4-5 percent of the labor force is unemployed.
D. 100 percent of the labor force is employed.

C. about 4-5 percent of the labor force is unemployed.

24. In the United States, the rate of unemployment is highest for:
A. white teenagers.
B. African-American teenagers.
C. married women.
D. unmarried women.

B. African-American teenagers.

25. Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kara presently is:
A. cyclically unemployed.
B. structurally unemployed.
C. frictionally unemployed.
D. not a member of the labor force.

C. frictionally unemployed.

26. According to the Bureau of Labor Statistics, to be officially unemployed a person must:
A. be in the labor force.
B. be 21 years of age or older.
C. have lost a job.
D. be waiting to be called back from a layoff.

A. be in the labor force.

27. The natural rate of unemployment is:
A. higher than the full-employment rate of unemployment.
B. lower than the full-employment rate of unemployment.
C. that rate of unemployment occurring when the economy is at its potential output.
D. found by dividing total unemployment by the size of the labor force.

C. that rate of unemployment occurring when the economy is at its potential output.

28. The labor force includes:
A. employed workers and persons who are officially unemployed.
B. employed workers, but excludes persons who are officially unemployed.
C. full-time workers, but excludes part-time workers.
D. permanent employees, but excludes temporary employees.

A. employed workers and persons who are officially unemployed.

29. The unemployment rate of:
A. women greatly exceeds that of men.
B. whites is roughly equal to that of African-Americans.
C. managerial and professional workers exceeds that of construction and extraction workers.
D. teenagers is much higher than that of adults.

D. teenagers is much higher than that of adults.

30. Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is:
A. unemployed.
B. employed.
C. not in the labor force.
D. in the labor force.

C. not in the labor force.

31. If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the:
A. frictional unemployment rate is 5 percent.
B. cyclical unemployment rate and the frictional unemployment rate together are 5 percent.
C. cyclical unemployment rate is 4 percent.
D. natural rate of unemployment will eventually increase.

C. cyclical unemployment rate is 4 percent.

32. Official unemployment statistics:
A. understate unemployment because individuals receiving unemployment compensation are counted as employed.
B. understate unemployment because discouraged workers are not counted as unemployed.
C. include cyclical and structural unemployment, but not frictional unemployment.
D. overstate unemployment because workers who are involuntarily working part time are counted as being employed.

B. understate unemployment because discouraged workers are not counted as unemployed.

33. The presence of discouraged workers:
A. increases the size of the labor force, but does not affect the unemployment rate.
B. reduces the size of the labor force, but does not affect the unemployment rate.
C. may cause the official unemployment rate to understate the true amount of unemployment.
D. may cause the official unemployment rate to overstate the true amount of unemployment.

C. may cause the official unemployment rate to understate the true amount of unemployment.

34. Part-time workers are counted as:
A. unemployed and therefore the official unemployment rate may overstate the level of unemployment.
B. unemployed and therefore the official unemployment rate may understate the level of unemployment.
C. fully employed and therefore the official unemployment rate may overstate the level of unemployment.
D. fully employed and therefore the official unemployment rate may understate the level of unemployment.

D. fully employed and therefore the official unemployment rate may understate the level of unemployment.

35. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is:
A. 3 percent.
B. 6 percent.
C. 7 percent.
D. 53 percent.

B. 6 percent.

36. The natural rate of unemployment is the:
A. unemployment rate experienced at the depth of a depression.
B. full-employment unemployment rate.
C. unemployment rate experienced by the least-skilled workers in the economy.
D. unemployment rate experienced by the most-skilled workers in the economy.

B. full-employment unemployment rate.

37. Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Kyle will be considered as:
A. cyclically unemployed.
B. frictionally unemployed.
C. structurally unemployed.
D. employed.

B. frictionally unemployed.

38. The unemployment rate is the:
A. ratio of unemployed to employed workers.
B. number of employed workers minus the number of workers who are not in the labor force.
C. percentage of the labor force that is unemployed.
D. percentage of the total population that is unemployed.

C. percentage of the labor force that is unemployed.

39. Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would:
A. decline.
B. increase.
C. increase in the short run but eventually decline.
D. be unchanged.

A. decline.

40. Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon where she anticipates that a new job will be available. We can say that Susie is faced with:
A. seasonal unemployment.
B. cyclical unemployment.
C. structural unemployment.
D. frictional unemployment.

C. structural unemployment.

42. Which of the following is correct?
A. The unemployment rates of men and women workers are roughly the same.
B. Unemployment rates for African-American and white workers are approximately the same.
C. Teenagers experience approximately the same unemployment rates as do adults.
D. Laborers are less vulnerable to unemployment than are professional workers.

A. The unemployment rates of men and women workers are roughly the same.

43. A college graduate using the summer following graduation to search for a job would best be classified as:
A. not officially a member of the labor force.
B. a part of structural unemployment.
C. a part of cyclical unemployment.
D. a part of frictional unemployment.

D. a part of frictional unemployment.

44. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. compositional unemployment.

B. structural unemployment.

45. Structural unemployment:
A. is also known as frictional unemployment.
B. is the main component of cyclical unemployment.
C. is said to occur when people are waiting to be called back to previous jobs.
D. may involve a locational mismatch between unemployed workers and job openings.

D. may involve a locational mismatch between unemployed workers and job openings.

46. Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as:
A. structurally unemployed.
B. frictionally unemployed.
C. not in the labor force.
D. employed.

D. employed.

47. Which of the following constitute the types of unemployment occurring at the natural rate of unemployment?
A. Frictional and cyclical unemployment.
B. Structural and frictional unemployment.
C. Cyclical and structural unemployment.
D. Frictional, structural, and cyclical unemployment.

B. Structural and frictional unemployment.

48. Wait unemployment and search unemployment are both types of:
A. cyclical unemployment.
B. hidden unemployment.
C. frictional unemployment.
D. structural unemployment.

C. frictional unemployment.

49. The type of unemployment associated with recessions is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. seasonal unemployment.

C. cyclical unemployment.

50. Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result:
A. the official unemployment rate will fall.
B. the official unemployment rate will rise.
C. the official unemployment rate will remain unchanged.
D. the size of the labor force will increase.

C. the official unemployment rate will remain unchanged.

51. The government agency responsible for collecting and reporting unemployment data is the:
A. Bureau of Labor Statistics.
B. Bureau of Unemployment.
C. Bureau of Economic Analysis.
D. Bureau of Economic Research.

A. Bureau of Labor Statistics.

52. At the economy’s natural rate of unemployment:
A. the economy achieves its potential output.
B. there is only a relatively small amount of cyclical unemployment.
C. only frictional unemployment exists.
D. only structural unemployment exists.

A. the economy achieves its potential output.

53. In the depth of the Great Depression, the unemployment rate in the United States was about:
A. 15 percent.
B. 33 percent.
C. 25 percent.
D. 40 percent.

C. 25 percent.

57. Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services?
A. Search unemployment
B. Wait unemployment
C. Cyclical unemployment
D. Frictional unemployment

C. Cyclical unemployment

58. The GDP gap measures the difference between:
A. NDP and GDP.
B. NI and PI.
C. actual GDP and potential GDP.
D. nominal GDP and real GDP.

C. actual GDP and potential GDP.

59. A large negative GDP gap implies:
A. an excess of imports over exports.
B. a low rate of unemployment.
C. a high rate of unemployment.
D. a sharply rising price level.

C. a high rate of unemployment.

60. The aggregate cost of unemployment can be measured by the:
A. amount by which actual GDP exceeds potential GDP.
B. amount by which potential GDP exceeds actual GDP.
C. excess of real GDP over nominal GDP.
D. excess of nominal GDP over real GDP.

B. amount by which potential GDP exceeds actual GDP.

61. If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is:
A. $510 billion.
B. $490 billion.
C. $10 billion.
D. $990 billion.

A. $510 billion.

62. If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is:
A. $360 billion.
B. $660 billion.
C. $320 billion.
D. $20 billion.

C. $320 billion.

63. If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is:
A. $300 billion.
B. $30 billion.
C. $360 billion.
D. $630 billion.

C. $360 billion.

64. If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:
A. $415 billion.
B. $385 billion.
C. $15 billion.
D. $785 billion.

B. $385 billion.

66. The relationship between the size of the negative GDP gap and the unemployment rate is:
A. direct.
B. inverse.
C. undefined.
D. direct during recession, but inverse during expansion.

A. direct.

67. If actual GDP is less than potential GDP:
A. potential GDP will fall.
B. the price level will rise.
C. investment spending will fall.
D. the actual unemployment rate will be higher than the natural unemployment rate.

D. the actual unemployment rate will be higher than the natural unemployment rate.

68. Full-employment output is also called:
A. zero-unemployment output.
B. equilibrium output.
C. potential output.
D. zero-savings output.

C. potential output.

74. Inflation means that:
A. all prices are rising, but at different rates.
B. all prices are rising and at the same rate.
C. prices on average are rising, although some particular prices may be falling.
D. real incomes are rising.

C. prices on average are rising, although some particular prices may be falling.

75. If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:
A. inflation of 4 percent.
B. inflation of 3.33 percent.
C. deflation of 3.33 percent = (100 X 4)/120
D. deflation of 4 percent.

C. deflation of 3.33 percent = (100 X 4)/120

76. The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:
A. 2.8 percent.
B. 3.4 percent.
C. 1.6 percent = (179.9 – 177.1)/177.1
D. 4.1 percent.

C. 1.6 percent = (179.9 – 177.1)/177.1

77. The annual rate of inflation can be found by subtracting:
A. the real income from the nominal income.
B. last year’s price index from this year’s price index.
C. this year’s price index from last year’s price index and dividing the difference by this year’s price index.
D. last year’s price index from this year’s price index and dividing the difference by last year’s price index.

D. last year’s price index from this year’s price index and dividing the difference by last year’s price index.

78. If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:
A. 11 percent = 33/100 = 0.11
B. 33 percent.
C. 91 percent.
D. 10 percent.

A. 11 percent = 33/100 = 0.11

84. Compared to other industrial nations, inflation rates in the United States are:
A. significantly higher.
B. significantly lower.
C. significantly higher than those in Europe, and significantly lower than those in Japan.
D. neither significantly higher nor significantly lower.

D. neither significantly higher nor significantly lower.

85. Demand-pull inflation:
A. occurs when prices of resources rise, pushing up costs and the price level.
B. occurs when total spending exceeds the economy’s ability to provide output at the existing price level.
C. occurs only when the economy has reached its absolute production capacity.
D. is also called cost-push inflation.

B. occurs when total spending exceeds the economy’s ability to provide output at the existing price level.

86. Demand-pull inflation:
A. occurs when total spending in the economy is excessive.
B. is measured differently than cost-push inflation.
C. can be present even during an economic depression.
D. is also called "hyperinflation."

A. occurs when total spending in the economy is excessive.

87. The phrase "too much money chasing too few goods" best describes:
A. the GDP gap.
B. demand-pull inflation.
C. the inflation premium.
D. cost-push inflation.

B. demand-pull inflation.

88. Unlike demand-pull inflation, cost-push inflation:
A. is self-limiting.
B. drives up the price level.
C. increases nominal income.
D. increases real income.

A. is self-limiting.

89. Inflation initiated by increases in wages or other resource prices is labeled:
A. demand-pull inflation.
B. demand-push inflation.
C. cost-push inflation.
D. cost-pull inflation.

C. cost-push inflation.

91. Cost-push inflation may be caused by:
A. a decline in per unit production costs.
B. a decrease in wage rates.
C. a negative supply shock.
D. an increase in resource availability.

C. a negative supply shock.

92. Rising per-unit production costs are most directly associated with:
A. frictional unemployment.
B. structural unemployment.
C. demand-pull inflation.
D. cost-push inflation.

D. cost-push inflation.

93. Which of the following would most likely occur during the expansionary phase of the business cycle?
A. Demand-pull inflation
B. Cost-push inflation
C. Structural inflation
D. Frictional inflation

A. Demand-pull inflation

99. Suppose that a person’s nominal income rises by 5 percent and the price level rises from 125 to 130. The person’s real income will:
A. fall by about 1 percent.
B. remain constant.
C. rise by about 4 percent.
D. rise by about 1 percent = 5/125 = 4%

D. rise by about 1 percent = 5/125 = 4%

103. Cost-push inflation:
A. reduces real output.
B. increases real output.
C. reduces the unemployment rate.
D. raises the natural rate of unemployment.

A. reduces real output.

104. Cost-of-living adjustment clauses (COLAs):
A. invalidate the "rule of 70."
B. apply only to demand-pull inflation.
C. increase the gap between nominal and real income.
D. tie wage increases to changes in the price level.

D. tie wage increases to changes in the price level.

105. During a period of hyperinflation:
A. creditors gain because their loans are repaid with dollars of higher value.
B. people tend to hold goods rather than money.
C. income is redistributed away from borrowers.
D. the real value of the national currency rises.

B. people tend to hold goods rather than money.

106. Inflation is undesirable because it:
A. arbitrarily redistributes real income and wealth.
B. invariably leads to hyperinflation.
C. usually is accompanied by declining real GDP.
D. reduces everyone’s standard of living.

A. arbitrarily redistributes real income and wealth.

107. Who is least likely to be hurt by unanticipated inflation?
A. a disabled laborer who is living off accumulated savings
B. an owner of a small business
C. a secretary
D. a pensioned steelworker

B. an owner of a small business

108. A lender need not be penalized by inflation if the:
A. long-term rate of inflation is less than the short-term rate of inflation.
B. short-term rate of inflation is less than the long-term rate of inflation.
C. lender correctly anticipates inflation and increases the nominal interest rate accordingly.
D. inflation is unanticipated by both borrower and lender.

C. lender correctly anticipates inflation and increases the nominal interest rate accordingly.

110. Inflation affects:
A. both the level and the distribution of income.
B. neither the level nor the distribution of income.
C. the distribution, but not the level, of income.
D. the level, but not the distribution, of income.

A. both the level and the distribution of income.

111. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:
A. 8 percent.
B. 5 percent.
C. 3 percent.
D. 2 percent.

C. 3 percent.

112. If both the real interest rate and the nominal interest rate are 3 percent, then the:
A. inflation premium is zero.
B. real GDP must exceed the nominal GDP.
C. nominal GDP must exceed real GDP.
D. inflation premium also is 3 percent.

A. inflation premium is zero.

113. Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:
A. 6 percent.
B. 8 percent.
C. 2 percent.
D. 3 percent.

D. 3 percent.

114. Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:
A. 2 percent.
B. 3 percent.
C. 5 percent.
D. 7 percent.

D. 7 percent.

117. (Last Word) Declines in stock prices measured by the Dow Jones average:
A. are a major cause of recessions.
B. usually reduce saving and increase consumption spending.
C. usually increase investment and reduce net exports.
D. sometimes precede recessions; sometimes do not.

D. sometimes precede recessions; sometimes do not.

118. (Last Word) Changes in stock market prices:
A. do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy.
B. greatly impact the macroeconomy but used alone are not reliable predictors of the future health of the economy.
C. greatly impact the macroeconomy and used alone are reliable predictors of the future health of the economy.
D. do not greatly impact the macroeconomy but used alone are reliable predictors of the future health of the economy.

A. do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy.

119. (Last Word) A burst stock market bubble might adversely affect the economy by:
A. causing rapid inflation.
B. greatly reducing net exports.
C. causing a severe negative wealth effect, leading to pessimism about the economy’s future.
D. raising interest rates.

C. causing a severe negative wealth effect, leading to pessimism about the economy’s future.

120. The production of durable goods is more stable than the production of nondurables over the business cycle.

FALSE

121. The business cycle is so named because upswings and downswings in business activity are predictably equal in terms of duration and intensity.

FALSE

122. People who work part time, but desire to work full time, are considered to be officially unemployed.

FALSE

123. The natural rate of unemployment in the United States is about 4 to 5 percent.

TRUE

124. An annual rate of inflation of 7 percent will double the price level in about 15 years.
FALSE

FALSE

125. During the past ten years the annual rate of inflation in the United States has averaged less than 1 percent.
FALSE

FALSE

126. If the price level doubled in a 23-year period, we can conclude that the average annual rate of inflation over that period was about 3 percent.

TRUE

127. Unanticipated inflation benefits debtors at the expense of creditors.

TRUE

128. Unanticipated inflation benefits some groups in the economy.

TRUE

129. If the nominal interest rate is 8 percent and the real interest rate is 5 percent, then the inflation premium is 13 percent.
FALSE

FALSE

1. The most important determinant of consumer spending is:
A. the level of household borrowing.
B. consumer expectations.
C. the stock of wealth.
D. the level of income.

D. the level of income.

2. The most important determinant of consumption and saving is the:
A. level of bank credit.
B. level of income.
C. interest rate.
D. price level.

B. level of income.

9. The consumption forecast directly relates:
A. consumption to the level of disposable income.
B. saving to the level of disposable income.
C. disposable income to domestic income.
D. consumption to saving.

A. consumption to the level of disposable income.

10. A decline in disposable income:
A. increases consumption by moving upward along a specific consumption schedule.
B. decreases consumption because it shifts the consumption schedule downward.
C. decreases consumption by moving downward along a specific consumption schedule.
D. increases consumption because it shifts the consumption schedule upward.

C. decreases consumption by moving downward along a specific consumption schedule.

12. The consumption forecast shows:
A. a direct relationship between aggregate consumption and accumulated wealth.
B. a direct relationship between aggregate consumption and aggregate income.
C. an inverse relationship between aggregate consumption and accumulated financial wealth.
D. an inverse relationship between aggregate consumption and the price level.

B. a direct relationship between aggregate consumption and aggregate income.

15. The consumption forecast is drawn on the assumption that as income increases, consumption will:
A. be unaffected.
B. increase absolutely, but remain constant as a percentage of income.
C. increase absolutely, but decline as a percentage of income.
D. increase both absolutely and as a percentage of income.

C. increase absolutely, but decline as a percentage of income.

20. As disposable income increases, consumption:
A. and saving both increase.
B. and saving both decrease.
C. decreases and saving increases.
D. increases and saving decreases.

A. and saving both increase.

21. The relationship between consumption and disposable income is such that:
A. an inverse and stable relationship exists between consumption and income.
B. a direct, but very volatile, relationship exists between consumption and income.
C. a direct and relatively stable relationship exists between consumption and income.
D. the two are usually equal.

C. a direct and relatively stable relationship exists between consumption and income.

24. In contrast to investment, consumption is:
A. relatively unstable.
B. relatively stable.
C. measurable.
D. unmeasurable.

B. relatively stable.

27. Which one of the following will cause a movement down along an economy’s consumption forecast?
A. an increase in stock prices
B. a decrease in stock prices
C. an increase in consumer indebtedness
D. a decrease in disposable income

D. a decrease in disposable income

38. Dissaving means:
A. the same thing as disinvesting.
B. that households are spending more than their current incomes.
C. that saving and investment are equal.
D. that disposable income is less than zero.

B. that households are spending more than their current incomes.

39. Dissaving occurs where:
A. income exceeds consumption.
B. saving exceeds consumption.
C. consumption exceeds income.
D. saving exceeds income.

C. consumption exceeds income.

41. The saving forecast is drawn on the assumption that as income increases:
A. saving will decline absolutely and as a percentage of income.
B. saving will increase absolutely, but remain constant as a percentage of income.
C. saving will increase absolutely, but decline as a percentage of income.
D. saving will increase absolutely and as a percentage of income.

D. saving will increase absolutely and as a percentage of income.

43. The saving schedule is such that as aggregate income increases by a certain amount saving:
A. increases by the same amount as the increase in income.
B. does not change.
C. increases, but by a smaller amount.
D. increases by an even larger amount.

C. increases, but by a smaller amount.

46. If the marginal propensity to consume is .9, then the marginal propensity to save must be:
A. 1.
B. .1.
C. 1.1.
D. .9.

B. .1.

47. The greater is the marginal propensity to consume, the:
A. smaller is the marginal propensity to save.
B. higher is the interest rate.
C. smaller is the average propensity to consume.
D. lower is the price level.

A. smaller is the marginal propensity to save.

49. Which one of the following will cause a movement up along an economy’s saving schedule?
A. an increase in household borrowing
B. an increase in disposable income
C. an increase in stock prices
D. an increase in interest rates

B. an increase in disposable income

50. In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
A. Keynes effect.
B. interest-rate effect.
C. wealth effect.
D. multiplier effect.

C. wealth effect.

57. Which of the following will not tend to shift the consumption forecast upward?
A. a currently small stock of durable goods in the possession of consumers
B. the expectation of a future decline in the consumer price index
C. a currently low level of household debt
D. the expectation of future shortages of essential consumer goods

B. the expectation of a future decline in the consumer price index

58. If the consumption forecast shifts upward and the shift was not caused by a tax change, the saving forecast:
A. will not shift.
B. may shift either upward or downward.
C. will shift downward.
D. will also shift upward.

C. will shift downward.

60. When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
A. both the consumption and saving schedules downward.
B. both the consumption and saving schedules upward.
C. the consumption schedule upward and the saving schedule downward.
D. the consumption schedule downward and the saving schedule upward.

A. both the consumption and saving schedules downward.

61. If for some reason households become increasingly thrifty, we could show this by:
A. a downshift of the saving schedule.
B. an upward shift of the consumption schedule.
C. an upward shift of the saving schedule.
D. a movement down along a stable consumption function.

C. an upward shift of the saving schedule.

63. Assume the economy’s consumption and saving schedules simultaneously shift downward. This must be the result of:
A. an increase in disposable income.
B. an increase in household wealth.
C. an increase in personal taxes.
D. the expectation of a recession.

C. an increase in personal taxes.

99. The investment demand curve portrays an inverse (negative) relationship between:
A. investment and real GDP.
B. the real interest rate and investment.
C. the nominal interest rate and investment.
D. the price level and investment.

B. the real interest rate and investment.

105. The relationship between the real interest rate and investment can be shown by the:
A. investment demand schedule.
B. consumption of fixed capital schedule.
C. saving schedule.
D. aggregate supply curve.

A. investment demand schedule.

106. Given the expected rate of return on all possible investment opportunities in the economy:
A. an increase in the real rate of interest will reduce the level of investment.
B. a decrease in the real rate of interest will reduce the level of investment.
C. a change in the real interest rate will have no impact on the level of investment.
D. an increase in the real interest rate will increase the level of investment.

A. an increase in the real rate of interest will reduce the level of investment.

107. A decline in the real interest rate will:
A. increase the amount of investment spending.
B. shift the investment schedule downward.
C. shift the investment demand curve to the right.
D. shift the investment demand curve to the left.

A. increase the amount of investment spending.

108. The immediate determinants of investment spending are the:
A. expected rate of return on capital goods and the real interest rate.
B. level of saving and the real interest rate.
C. marginal propensity to consume and the real interest rate.
D. interest rate and the expected price level.

A. expected rate of return on capital goods and the real interest rate.

112. If business taxes are reduced and the real interest rate increases:
A. consumption and saving will necessarily increase.
B. the level of investment spending might either increase or decrease.
C. the level of investment spending will necessarily increase.
D. the level of investment spending will necessarily decrease.

B. the level of investment spending might either increase or decrease.

116. Other things equal, if the real interest rate falls and business taxes rise:
A. investment will rise until it is equal to saving.
B. we will be uncertain as to the resulting change in investment.
C. we can be certain that investment will rise.
D. we can be certain that investment will fall.

B. we will be uncertain as to the resulting change in investment.

117. The investment demand curve will shift to the higher level as a result of:
A. an increase in the excess production capacity available in industry.
B. an increase in business taxes.
C. technological progress.
D. an increase in the acquisition and maintenance cost of capital goods.

C. technological progress.

118. The investment demand curve will shift to the lower level as a result of:
A. an increase in the excess production capacity available in industry.
B. a decrease in business taxes.
C. increased business optimism with respect to future economic conditions.
D. a decrease in labor costs.

A. an increase in the excess production capacity available in industry.

121. The real interest rate is:
A. the percentage increase in money that the lender receives on a loan.
B. the percentage increase in purchasing power that the lender receives on a loan.
C. also called the after-tax interest rate.
D. usually higher than the nominal interest rate.

B. the percentage increase in purchasing power that the lender receives on a loan.

122. When we draw an investment demand curve we can hold constant all of the following except:
A. the expected rate of return on the investment.
B. business taxes.
C. the interest rate.
D. the present stock of capital goods.

C. the interest rate.

123. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:
A. 18 percent.
B. 24 percent.
C. 12 percent.
D. 6 percent.

C. 12 percent.

124. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
A. 2 percent.
B. zero percent.
C. 10 percent.
D. 22 percent.

D. 22 percent.

125. A high rate of inflation is likely to cause a:
A. high nominal interest rate.
B. low nominal interest rate.
C. low rate of growth of nominal GDP.
D. decrease in nominal wages.

A. high nominal interest rate.

126. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:
A. more investment will be forthcoming when i exceeds r.
B. less investment will be forthcoming when r rises.
C. r will fall as more investment is undertaken.
D. r will exceed i at all possible levels of investment.

C. r will fall as more investment is undertaken.

127. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:
A. investment will take place until i and r are equal.
B. investment will take place until r exceeds i by the greatest amount.
C. r will rise as more investment is undertaken.
D. i will fall as more investment is undertaken.

A. investment will take place until i and r are equal.

133. Which of the following would shift the investment demand curve for the worst?
A. a lower interest rate
B. lower expected rates of return on investment
C. a higher interest rate
D. higher expected rates of return on investment

B. lower expected rates of return on investment

134. Which of the following would increase investment?
A. a lower interest rate
B. a higher interest rate
C. lower expected returns on investment
D. higher expected returns on investment

A. a lower interest rate

135. In annual percentage terms, investment spending in the United States is:
A. less variable than real GDP.
B. less variable than consumption spending.
C. less variable than the price level.
D. more variable than real GDP.

D. more variable than real GDP.

136. Investment spending in the United States tends to be unstable because:
A. expected profits are highly variable.
B. capital goods are durable.
C. innovation occurs at an irregular pace.
D. all of these contribute to the instability.

D. all of these contribute to the instability.

137. Investment spending in the United States tends to be unstable because:
A. profits are highly variable.
B. the price level fluctuates rapidly.
C. investment spending is affected by interest rates.
D. capital wears out quickly and must be replaced often.

A. profits are highly variable.

138. Capital goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending.
A. nondurable; instability
B. nondurable; stability
C. durable; instability
D. durable; stability

C. durable; instability

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