Recurring upswings and downswings in an economy’s real GDP over time are called:
In the United States, business cycles have occurred against a backdrop of a long-run trend of:
C. rising real GDP.
Most economists agree that the immediate determinant of the volume of output and employment is the:
C. level of total spending.
As it relates to economic growth, the term long-run trend refers to:
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?
B. capital goods
6. The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are:
D. capital goods and durable consumer goods.
7. During a severe recession, we would expect output to fall the most in:
D. the construction industry.
The phase of the business cycle in which real GDP declines is called:
C. a recession.
9. The phase of the business cycle in which real GDP is at a minimum is called:
C. the trough.
10. The production of durable goods varies more than the production of nondurable goods because:
B. durables purchases are postponable.
11. A recession is defined as a period in which:
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?
13. Which of the following statements is true about causes of business cycle fluctuations?
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
15. Most economists agree that the immediate cause of most business cycle variation is:
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.
17. What is the primary reason that changes in total spending lead to cyclical changes in output and employment?
C. Prices are sticky in the short run.
18. Innovations such as the microchip and the Internet lead to business cycle variations because:
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?
C. The central bank printing less money than was anticipated.
Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions
20. Refer to the above information. The labor force in Scoob is:
B. 102 million.
21. Refer to the above information. The unemployment rate in Scoob is:
D. 6.9 percent.
22. Refer to the above information. If the natural rate of unemployment in Scoob is 5 percent, then:
C. cyclical unemployment is about 2 percent.
23. The United States’ economy is considered to be at full employment when:
C. about 4-5 percent of the labor force is unemployed.
24. In the United States, the rate of unemployment is highest for:
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:
C. frictionally unemployed.
26. According to the Bureau of Labor Statistics, to be officially unemployed a person must:
A. be in the labor force.
27. The natural rate of unemployment is:
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.
29. The unemployment rate of:
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:
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:
C. cyclical unemployment rate is 4 percent.
32. Official unemployment statistics:
B. understate unemployment because discouraged workers are not counted as unemployed.
33. The presence of discouraged workers:
C. may cause the official unemployment rate to understate the true amount of unemployment.
34. Part-time workers are counted as:
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:
B. 6 percent.
36. The natural rate of unemployment is the:
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:
B. frictionally unemployed.
38. The unemployment rate is the:
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:
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:
C. structural unemployment.
41. Cyclical unemployment results from:
A. a deficiency of spending on goods and services.
42. Which of the following is correct?
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:
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:
B. structural unemployment.
45. Structural unemployment:
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:
47. Which of the following constitute the types of unemployment occurring at the natural rate of unemployment?
B. Structural and frictional unemployment.
48. Wait unemployment and search unemployment are both types of:
C. frictional unemployment.
49. The type of unemployment associated with recessions is called:
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:
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.
52. At the economy’s natural rate of unemployment:
A. the economy achieves its potential output.
53. In the depth of the Great Depression, the unemployment rate in the United States was about:
C. 25 percent.
Answer the question on the basis of the following information about a hypothetical economy:
54. Refer to the above information. The unemployment rate is:
B. 12.5 percent.
55. Refer to the above information. If the members of the underground economy are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by about:
C. 4 percentage points.
56. Refer to the above information. The rate of inflation:
D. cannot be determined from the data.
57. Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services?
C. Cyclical unemployment
58. The GDP gap measures the difference between:
C. actual GDP and potential GDP.
59. A large negative GDP gap implies:
C. a high rate of unemployment.
60. The aggregate cost of unemployment can be measured by the:
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.
62. If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is:
C. $320 billion.
63. If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is:
C. $360 billion.
64. If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:
B. $385 billion.
65. Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun’s law, the negative GDP gap as a percent of potential GDP is:
B. 8 percent.
66. The relationship between the size of the negative GDP gap and the unemployment rate is:
67. If actual GDP is less than potential GDP:
D. the actual unemployment rate will be higher than the natural unemployment rate.
68. Full-employment output is also called:
C. potential output.
Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun’s law is applicable:
69. Refer to the above data. The size of the negative GDP gap as a percent of potential GDP for the above economy is:
C. 12 percent.
70. Refer to the above data. The amount of output being forgone by the above economy is:
D. $24 billion.
71. Refer to the above data. If the unemployment rate in the above economy fell to 6 percent, we could conclude that:
C. the economy had moved from a point inside its production possibilities curve to a point on or near the curve.
72. Okun’s law:
D. shows the relationship between the unemployment rate and the size of the negative GDP gap.
73. For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of:
B. Okun’s law
74. Inflation means that:
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:
C. deflation of 3.33 percent.
76. The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:
C. 1.6 percent.
77. The annual rate of inflation can be found by subtracting:
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.
79. As applied to the price level, the “rule of 70” indicates that the number of years required for the price level to double can be found by:
B. dividing the annual rate of inflation into “70.”
80. Between 1980 and 2000 the price level approximately doubled. The average annual rate of inflation over this 20-year period was about:
C. 3.5 percent.
81. Given the annual rate of inflation, the “rule of 70” allows one to:
D. calculate the number of years required for the price level to double.
82. If Fred’s annual real income rises by 8 percent each year, his annual real income will double in about:
A. 8-9 years.
83. If the rate of inflation is 12 percent per year, the price level will double in about:
B. 6 years.
84. Compared to other industrial nations, inflation rates in the United States are:
D. neither significantly higher nor significantly lower.
85. Demand-pull 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.
87. The phrase “too much money chasing too few goods” best describes:
B. demand-pull inflation.
88. Unlike demand-pull inflation, cost-push inflation:
A. is self-limiting.
89. Inflation initiated by increases in wages or other resource prices is labeled:
C. cost-push inflation.
90. Cost-push inflation:
C. moves the economy inward from its production possibilities curve.
91. Cost-push inflation may be caused by:
C. a negative supply shock.
92. Rising per-unit production costs are most directly associated with:
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
94. Real income is found by:
D. dividing nominal income by the price index (in hundredths).
95. Which of the following formulas is correct? Percentage change in:
B. real income approximates percentage change in nominal income minus percentage change in price level.
96. Real income can be determined by:
D. deflating nominal income for inflation.
97. Suppose that a person’s nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person’s real income will:
C. rise by about 15 percent
98. Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is the critic correct?
B. No, because real income may fall if prices increase more proportionately than the increase in nominal income.
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:
D. rise by about 1 percent.
100. In 2005, Tatum’s nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum’s real income:
C. rose by approximately 3 percent.
101. In which of the following cases would real income rise?
B. Nominal income rises by 2 percent, and the price level remains unchanged.
102. Under which of the following circumstances would we observe the greatest increase in real income?
A. Nominal income falls by 2 percent, and the price level falls by 10 percent.
103. Cost-push inflation:
A. reduces real output.
104. Cost-of-living adjustment clauses (COLAs):
D. tie wage increases to changes in the price level.
105. During a period of hyperinflation:
B. people tend to hold goods rather than money.
106. Inflation is undesirable because it:
A. arbitrarily redistributes real income and wealth.
107. Who is least likely to be hurt by unanticipated inflation?
B. an owner of a small business
108. A lender need not be penalized by inflation if the:
C. lender correctly anticipates inflation and increases the nominal interest rate accordingly.
109. Unanticipated inflation:
A. reduces the real burden of the public debt to the Federal government.
110. Inflation affects:
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:
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.
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:
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:
D. 7 percent.
115. (Consider This) The feudal practice of clipping coins illustrates the idea of:
A. taxation through inflation.
116. (Consider This) The main point of the Consider This box on clipping coins is that:
C. inflation imposes a “hidden tax” on those who hold money.
117. (Last Word) Declines in stock prices measured by the Dow Jones average:
D. sometimes precede recessions; sometimes do not.
18. (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.
119. (Last Word) A burst stock market bubble might adversely affect the economy by:
C. causing a severe negative wealth effect, leading to pessimism about the economy’s future.
2. The above diagram is best described as an idealized:
A. Business cycle
3. Refer to the above diagram. The phases of the business cycle from points A to D are, respectively:
D. Peak, recession, trough, expansion
4. Refer to the above diagram. The straight line E drawn through the wavy lines would provide an estimate of the:
B. Growth trend
5. Which phase of the business cycle would be most closely associated with an economic contraction?
6. A peak in the business cycle:
C. Is a temporary maximum point
7. A trough in the business cycle occurs when:
B. Employment and output reach their lowest levels
8. In the expansion phase of a business cycle:
D. Employment and output increase
9. A recession is a decline in:
C. Real GDP that lasts six months or longer
10. What has been the range of the decline in real output during recessions in the U.S. between 1950 and 2001?
A. – 0.5 percent to – 4.9 percent
11. What has been the range for the duration in months of U.S. recessions between 1950 and 2001?
B. 6 months to 16 months
12. Which of the following groups declares the start and end of recessions in the U.S.?
C. The Business Cycle Dating Committee of the National Bureau of Economic Research
13. Some economists prefer to use the term business fluctuations rather than business cycles to describe the historical growth record in the United States because:
B. Cycles imply regularity while fluctuations do not
14. Most economists agree that the immediate cause of the majority of cyclical changes in the level of real output is unexpected changes in the:
A. Level of total spending
15. The Great Recession that started in 2007 was triggered by shocks in which of the following economic sectors?
C. Real estate and financial markets
16. In which industry or sector of the economy is output least likely to be affected by the business cycle?
C. Agricultural commodities
17. Which statement is correct?
C. The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle
18. The unemployment rate is interpreted as the percentage of the:
B. Labor force that are not employed
19. The full-time homemakers and retirees are classified in the BLS data as:
D. Not in the labor force
20. The unemployed are those people who:
B. Are not employed but are seeking work
21. Which of the following is the correct way to calculate the unemployment rate?
B. [(unemployed)/(labor force)] x 100
22. Assuming the total population is 200 million, the labor force is 100 million, and 92 million workers are employed, the unemployment rate is:
C. 8 percent
23. A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in institutions, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate?
B. 6 percent
24. The unemployment rate in an economy is 6%. The total population of the economy is 290 million, and the size of the civilian labor force is 150 million. The number of unemployed workers in this economy is:
B. 9 million
25. The total population of an economy is 175 million, the labor force is 125 million, and the number of employed workers is 117 million. The unemployment rate for this economy is:
C. 6.4 percent
26. The total adult population of an economy is 175 million, the number of employed is 122 million, and the number of unemployed is 17 million. The percent of adults who are not in the labor force is:
B. 20.6 percent
27. The unemployment rate in an economy is 7.5 percent. The total population of the economy is 250 million and the size of the civilian labor force is 180 million. The number of employed workers in this economy is:
C. 166.5 million
28. In calculating the unemployment rate, “discouraged” workers who are not actively seeking employment are:
A. Excluded from the labor force
29. In calculating the unemployment rate, part-time workers are:
B. Counted as employed because they are receiving payment for work
30. Official unemployment rate statistics may:
D. Understate the amount of unemployment because of the presence of “discouraged” workers who are not actively seeking employment
31. The best example of a “frictionally unemployed” worker is one who:
C. Is in the process of voluntarily switching jobs
32. A worker who loses a job at a call center because business firms switch the call center to another country is an example of:
B. Structural unemployment
33. Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is:
34. New college graduates still looking for their first jobs would be classified in the BLS data as:
A. Frictionally unemployed
35. A headline states: “Real GDP falls again as the economy slumps.” This condition is most likely to produce what type of unemployment?
36. Unemployment that occurs when there is deficient demand for the goods and services of an economy is called:
B. Cyclical unemployment
37. Which of the following statements is correct?
B. Structural unemployment is unemployment resulting from changes in the structure of consumer demand or technology
38. A mismatch between the geographic location of workers and the location of job openings would result in what type of unemployment?
39. Search and wait unemployment is another way to describe:
C. Frictional unemployment
The descriptions give the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment.
1. Mollie just graduated from college and is now looking for work. She has had three job interviews in the past month, but still has not gotten a job offer.
2. George used to work in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in a few months when national economic conditions improve.
3. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the Federal government cut defense spending. She has been looking for similar work for a year but no company seems interested in her aircraft design skills.
4. Ricardo lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year, but was unsuccessful and quit looking for work.
40. Refer to the above information. Which individual is frictionally unemployed?
41. Refer to the above information. Which individual is structurally unemployed?
42. Refer to the above information. Which individual is cyclically unemployed?
43. Refer to the above information. Which individual would be classified as a discouraged worker?
44. Refer to the above information. Which individual would be included in the calculation of the full-employment unemployment rate?
C. 1 and 3
45. “Full employment” refers to the situation when there is:
D. No cyclical unemployment
46. The full-employment rate of unemployment is also called the:
D. Natural rate of unemployment
47. The natural rate of unemployment:
C. Is equal to the total of frictional and structural unemployment
48. The rate of unemployment when the economy is at its potential output is called the:
B. Natural rate of unemployment
49. The full-employment unemployment rate for the United States economy is now generally considered to be:
C. 4 to 5 percent of the labor force
50. Potential GDP is the output that would be produced if the economy was experiencing:
D. Full employment
51. The GDP gap measures the amount by which:
C. Potential GDP exceeds actual GDP
52. The amount by which actual GDP falls short of potential GDP is one measure of the:
B. Macroeconomic cost of unemployment
53. If the GDP gap is positive, then:
D. Actual GDP is greater than potential GDP
54. If unemployment is above the natural rate of unemployment, then potential GDP is:
D. Greater than actual GDP
55. The higher the rate of unemployment:
A. The larger is the GDP gap
56. If the unemployment rate for the United States economy rises from 7 to 11 percent during a year, we can conclude that:
B. Actual GDP is less than potential GDP
57. If the negative GDP gap were equal to 4% of the potential GDP, Okun’s law suggests that the actual unemployment rate would exceed the natural rate of unemployment by:
B. Two percentage points
58. If the natural rate of unemployment was 6 percent, the current unemployment rate was 10 percent, and the potential GDP was $4,000 billion, then according to Okun’s law the economy would have sacrificed:
C. $320 billion in output not produced
59. Okun’s law indicates that for:
A. Every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, a 2 percent GDP gap is generated
60. If the natural rate of unemployment is 4.5 percent and the actual unemployment rate is 6.5 percent, then Okun’s law indicates that the GDP gap is:
C. 4 percent
61. A high unemployment rate most likely means that there is a:
C. Large GDP gap in the economy
62. The rate of unemployment tends to be lowest for:
D. White adult males
63. Unemployment rates for skilled workers compared to unemployment rates for unskilled workers are:
A. Lower, because skilled workers tend to be employed in less cyclically vulnerable industries, such as the services and nondurable goods industries
64. The unemployment rates in the U.S. from 1999 to 2009 were in the range of:
B. 4% to 10%
65. In the Great Recession of 2007-2009, unemployment rates for men:
A. Rose faster than those for women
66. “Depression means idleness. And idleness means loss of skills, loss of self-respect, plummeting morale, family disintegration, and sociopolitical unrest.” This quote describes some of the:
C. Noneconomic costs of unemployment
67. From 1999 to 2009, the unemployment rate in the United States compared with other industrially advanced nations, such as France and Germany, has been:
68. Inflation is a rise in:
A. The general level of prices over time
69. When inflation occurs:
D. The purchasing power of money decreases
70. The CPI compiled by the Bureau of Labor Statistics is used in the computations for:
B. Inflation rate
71. If the Consumer Price Index for a certain year is 120, this means that the average price of consumer items in that year was:
A. 20% higher than the average price in the base period 1982-84
72. If the Consumer Price Index was 170 in one year and 180 in the next year, then the rate of inflation is approximately:
B. 5.9 percent
73. The inflation rate measures the percentage growth rate of:
D. CPI from one year to the next
74. Which of the following measures the changes in the prices of a “market basket” of some 300 goods and services purchased by typical urban consumers?
B. The Consumer Price Index
75. Which measure of inflation would include consumer goods and capital goods?
A. The GDP price index
76. If the Consumer Price Index was 125 in one year and 120 in the following year, then the rate of inflation is approximately:
C. -4.0 percent
77. If the Consumer Price Index was 90 in one year and 100 in the following year, then the rate of inflation is about:
C. 11 percent
78. If the CPI declines from one year to the next, then the following statements are true, except:
D. The CPI turns negative in the next year
79. Which of the following statistics can turn negative?
D. Unemployment rate
80. The economy has an annual inflation rate of 3.5%. It will take approximately how many years for the price level to double?
B. 20 years
81. Over a ten-year period, the Consumer Price Index doubled. On the basis of this information and using the rule of 70, we can say that the average annual rate of inflation over this period was approximately:
C. 7 percent
82. Inflation rates in the U.S. from 1960 to 2009 were within the range of:
C. 0% – 14%
83. Inflation rates in the U.S. reached double-digit rates in the:
84. Which of the following countries experienced deflation for several years in the period 1999-2009?
85. Inflation caused by an increase in aggregate spending is referred to as:
C. Demand-pull inflation
86. Inflation that occurs when total spending is greater than the economy’s ability to produce output at the existing price level is:
B. Demand-pull inflation
87. A statement that is often used to describe demand-pull inflation is:
C. “Too much money chasing too few goods”
88. Which of the following is a correct statement?
C. Demand-pull inflation will continue so long as there is excess total spending in the economy
89. Inflation caused by a rise in the prices of inputs is referred to as:
A. Cost-push inflation
90. When oil and energy prices rise, the economy tends to experience:
C. Cost-push inflation
91. Only two resources, capital and labor, are used in an economy to produce an output of 600 million units. If the total cost of capital resources is $300 million and the total cost of labor resources is $100 million, then the per-unit production costs in this economy are:
92. In an economy, only two resources, capital and labor, are used to produce 50 units of output. If the total cost of capital resources is $125 and the total cost of labor resources is $25, then the per unit production costs are:
93. When total input costs rise slower than the total units of output produced, then the per-unit production costs:
A. Will decrease
94. If you knew that the per-unit production cost was $8 and that the total cost of inputs was $1,000, then the number of
95. Cost-push inflation tends to be characterized by all of the following, except:
D. Falling unemployment
96. Core inflation refers to the inflation picture after stripping away the:
B. Food and energy prices
97. For a given amount of nominal income, the real income will:
A. Fall if the price level rises
98. If the average level of nominal income in a nation is $44,000 and the price level index is 175, the average real income would be about:
99. Real income will rise from one year to the next if nominal income:
A. Falls and the price level falls faster
100. In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2?
C. It rose by $600
101. If a person’s nominal income increases by 5% while the price level increases by 2%, then that person’s real income:
A. Increases by 3%
102. A person’s real income will increase by 3% if her nominal income:
B. Increases by 5% while the price index rises by 2%
103. Recently a teachers’ union argued that the standard of living of teachers working for the school district was falling. The negotiating team for the school board replied that this was not true because the teachers had received significant increases in nominal income through collective bargaining. Could the union statement be correct?
C. Yes, because real income may fall if price increases are proportionately greater than the increases in nominal income
104. If the price level increases by 15 percent while nominal income increases by 8 percent, then in percentage terms real income would:
C. Fall by about 7 percent
105. For a person to keep his real income steady at a certain level from one year to the next, his nominal income must:
D. Rise as fast as the price index
106. The percentage change in one’s real income can be approximated by:
D. The percentage change in nominal income minus the percentage change in the price level
107. Unanticipated inflation arbitrarily:
B. “Taxes” those who receive fixed money incomes
108. Unanticipated inflation tends to penalize:
A. People who save money in financial institutions
109. Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated inflation occurs in the economy, then:
D. Lenders are hurt, but borrowers benefit
110. When unanticipated deflation occurs:
C. Debtors are hurt, but creditors benefit
111. Which of the following groups has traditionally benefited from unanticipated inflation?
C. Federal government
112. A worker would be hurt least by inflation when the:
B. Worker is protected by a cost-of-living adjustment clause in an employment contract
113. Which statement about inflation is correct?
C. The redistributive effects of inflation are arbitrary with respect to people and groups in society
114. In what circumstances would lenders most benefit?
A. When there is an unanticipated decrease in inflation
115. You are given the following information about the economy: (1) nominal interest = 8 percent; (2) real rate of interest = 6 percent. The inflation premium is:
A. 2 percent
116. With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But, if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of:
D. 10 percent
117. If the inflation premium is 3% and the real interest on a loan is 4%, then the nominal interest rate is:
118. Which of the following statements is correct?
D. For a given real interest rate, the nominal interest must increase if expected inflation increases
119. A cumulative wage-price spiral which produces a rapid and huge increase in the price level can be characterized as:
120. In the 1920s, Germany after the First World War experienced an economic condition which can be best described as:
121. Cross-country studies that bolster the “zero inflation” view indicate that lower rates of inflation are associated with:
B. Higher rates of economic growth
122. What are the primary effects of cost-push inflation?
B. It reduces real output and redistributes a decreased level of real income
124. What is an advantage of mild inflation according to some economists?
C. It makes it easier for firms to adjust real wages downward as demand for their products falls
125. What does research indicate about the effect volatility of stock-price averages on the stability of the macroeconomy?
D. Neither the wealth nor the investment effects of stock price changes are a major cause of macroeconomic instability
126. When stock market bubbles burst, the following usually occur, except:
C. The cheaper stock prices make businesses raise their expansion projects
127. Which of the following statements is true?
D. The stock market plunge in 2007 and 2008 contributed to the Great Recession of 2007-2009
7. A trough in the business cycle occurs when:
7. A trough in the business cycle occurs when: