Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) During a business cycle expansion, total production ________ and total employment ________.
A) increases; increases B) decreases; increases
1) _______

C) increases; decreases D) decreases; decreases

2) Suppose, in 2012, you purchased a house built in 2003. Which of the following would be included in
the gross domestic product for 2012? 2) _______

A) the value of the house in 2012 minus depreciation

B) the value of the house in 2003
C) the value of the house in 2012
D) the value of the services of the real estate agent

3) Gross domestic product is calculated by summing up

A) the total market value of final goods and services produced in the economy during a period of time.
3) _______

B) the total quantity of goods and services in the economy.

C) the total quantity of goods and services produced in the economy during a period of time.
D) the total market value of goods and services in the economy.

4) Which of the following goods is directly counted in GDP?

A) a 12-inch Subway sandwich purchased by a student
4) _______

B) the bread that Subway purchases for its sandwiches

C) the plastic bags that Subway purchases to wrap its sandwiches
D) the lettuce that Subway purchases for its sandwiches

5) Which of the following transactions represents the purchase of a final good?

A) Delta buys a new European-made jetliner.
5) _______

B) Apple computer buys computer processors from Intel.

C) Starbucks purchases coffee beans.
D) Your father buys a new John Deere riding lawn mower.

6) Value added equals the market price of the firm's product minus
A) depreciation on plant and equipment. B) wages and salaries.
6) _______

C) the price of all factors of production. D) the price of intermediate goods.

Table 19-1
 Product Quantity Price
Sweatshirts 50 $35.00
Dental examinations 40 75.00
Coffee drinks 1,000 4.00
Coffee beans 2,000 0.50

7) Refer to Table 19-1. Suppose that a simple economy produces only four goods and services:
sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used
in the production of the coffee drinks. Using the information in the above table, nominal GDP for this
simple economy equals 7) _______

A) 3,090 units. B) $7,250. C) $8,750. D) $9,750.

8) The purchase of a new automobile is included in

A) consumption expenditures on nondurable goods.
8) _______

B) consumption expenditures on durable goods.

C) investment expenditures.
D) consumption expenditures on services.

9) The factors of production include

A) investment. B) transfers. C) wages. D) capital.
9) _______

10) Investment, as defined by economists, would include the purchase of a

A) computer by an accounting firm. B) share of stock in ExxonMobil.
10) ______

C) corporate bond. D) government bond.

11) The purchase by a household in China of a CD produced in the United States is included in U.S.
A) consumption expenditures. B) government purchases.
11) ______

C) net exports. D) investment expenditures.

12) When consumers are less confident about their jobs or incomes, they are more likely to
A) increase investment spending and decrease consumption spending.
12) ______

B) increase consumption spending and decrease investment spending.

C) reduce purchases of durable goods than nondurable goods.
D) reduce purchases of nondurable goods and increase purchases of durable goods.

Table 19-4

Consumption expenditures $800

Investment expenditures 300
Government purchases 300
Government transfer
payments 400
Exports 300
Imports 100

13) Refer to Table 19-4. Consider the data above (in billions of dollars) for an economy: Gross domestic
product (in billions of dollars) for this economy equals 13) ______

A) $2,200. B) $2,100. C) $1,600. D) $1,400.

Scenario 19-1

CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and uses its labor
and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The
retail canoe store then sells the canoe to a consumer for $1,200.

14) Refer to Scenario 19-1. The value added of CANOES-R-US for each canoe equals
A) $1,200. B) $800. C) $500. D) $400.
14) ______

15) Gross domestic product understates the total production of final goods and services because of the
omission of 15) ______

A) exports. B) household production.

C) intermediate goods. D) inflation.

16) The size of the underground economy would tend to decrease if the government of a country
A) increased business taxes.
16) ______

B) made over-the-counter drugs illegal.

C) increased income tax rates.
D) decreased government regulations on businesses.

17) The size of the underground economy would tend to increase if the government of a country
A) legalized marijuana.
17) ______

B) decreased government regulations on businesses.

C) legalized prostitution.
D) increased income tax rates.

18) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have
eight children. Bob stops working for Mary in order to care for the children. What will be the effect on
GDP? 18) ______

A) GDP will not change.

B) GDP will increase.
C) GDP will decrease.
D) GDP may increase or may decrease depending on inflation.

19) Legalizing all forms of illegal activities

A) increases GDP and reduces the size of the underground economy.
19) ______

B) increases GDP and increases the size of the underground economy.

C) reduces GDP and the size of the underground economy.
D) reduces GDP and increases the size of the underground economy.

20) Which of the following statements is true?

A) GDP accounting rules do not adjust for production that pollutes the economy.
20) ______

B) Household production is counted in GDP as it amounts to real production.

C) GDP growth distributes income equally to people in the economy.
D) A decrease in the crime rate increases GDP as people will spend more on security.

21) Increases in real GDP would overstate the increase in the well-being of a country over time if, over
that time period, the 21) ______

A) amount of pollution decreased.

B) price level increased.
C) average hours worked per week increased.
D) crime rate decreased.

22) Increases in real GDP would understate the well-being of a country over time if, over that time period,
the 22) ______

A) average hours worked per week decreased.

B) crime rate increased.
C) amount of pollution decreased.
D) percentage of people addicted to illegal drugs increased.

23) If GDP calculations included measurements of pollution and environmental damage, GDP values
would most likely be 23) ______

A) less than their values without these measurements.

B) unchanged from their values without these measurements.
C) meaningless, since GDP values without these measurements would no longer be of value.
D) greater than their values without these measurements.

Table 19-8

Year Guns Produced Price of Guns Butter Produced Price of Butter

2005 80 $5 40 $4
2011 90 6 60 10

Consider the following data for Tyrovia, a country that produces only two products: guns and butter.

24) Refer to Table 19-8. Real GDP for Tyrovia for 2011 using 2005 as the base year equals
A) $1,140. B) $880. C) $690. D) $560.
24) ______

Table 19-9

Year Nominal GDP Real GDP

2008 $7,400 $7,537
2009 7,813 7,813
2010 8,301 8,165
 2011 8,760 8,516

25) Refer to Table 19-9. Consider the following data on nominal GDP and real GDP (values are in
billions of dollars): The base year used in calculating real GDP is 25) ______

A) 2008. B) 2009. C) 2010. D) 2011.

26) If the quantity of goods and services produced in the economy decreases,
A) it may be possible for nominal GDP to increase.
26) ______

B) nominal GDP would certainly increase.

C) it may be possible for real GDP to increase.
D) real GDP would certainly increase.

27) Suppose that nominal GDP in 2011 was less than real GDP in 2011. Given this information, we know
for certain that 27) ______

A) real GDP in 2011 was greater than real GDP in the base year.
B) real GDP in 2011 was less than real GDP in the base year.
C) the price level in 2011 was greater than the price level in the base year.
D) the price level in 2011 was less than the price level in the base year.

28) Which of the following could cause nominal GDP to decrease, but real GDP to increase?
A) The price level rises and the quantity of final goods and services produced rises.
28) ______

B) The price level rises and the quantity of final goods and services produced falls.
C) The price level falls and the quantity of final goods and services produced falls.
D) The price level falls and the quantity of final goods and services produced rises.

29) If real GDP in 2011 (using 2002 prices) is lower than nominal GDP of 2010, then
A) prices in 2011 are higher than prices in 2010.
29) ______

B) real GDP in 2011 is larger than real GDP in 2010.

C) prices in 2011 are lower than prices in 2010.
D) nominal GDP in 2011 equals nominal GDP in 2010.

30) To examine how the total production of an economy has changed over time, it would be better to
examine 30) ______

A) the GDP deflator. B) nominal GDP.

C) real GDP. D) GDP at current prices.

31) Nominal GDP will increase

A) if either the price level or the quantity of goods and services produced rises.
31) ______

B) only if the quantity of final goods and services produced rises.

C) only if the price level falls.
D) only if the price level rises.
32) If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be
A) less than 100. B) greater than 100.
32) ______

C) less than 0. D) equal to 100.

33) If the GDP deflator is less than 100, then for that year nominal GDP ________ real GDP.
A) is less than B) equals
33) ______

C) is greater than D) may be greater than or less than

34) The output of Mexican citizens who work in Texas would be included in the
A) gross national product of the United States.
34) ______

B) gross domestic product of Mexico.

C) gross national product of Mexico.
D) net national product of the United States.

35) If an American firm opens a production facility in India, the total value of the production will be
included in the 35) ______

A) gross domestic product of the United States.

B) national income of the United States.
C) national income of India.
D) gross domestic product of India.

36) Which of the following is included in both the U.S. GDP and U.S. GNP?
A) the value of all cars produced by Ford in Mexico
36) ______

B) the value of all cars produced by General Motors in the United States
C) the value of all cars produced by Toyota in the United States
D) the value of all cars produced by Nissan in Japan and the United States

37) The value of what a U.S.-owned McDonald's produces in South Korea is included in the U.S. ________
and the South Korean ________. 37) ______

A) GNP; GDP B) GNP; GNP C) GDP; GDP D) GDP; GNP

38) Disposable personal income equals personal income

A) minus government transfer payments plus personal tax payments.
38) ______

B) minus personal tax payments.

C) minus personal tax payments plus government transfer payments.
D) plus government transfer payments.

39) The economy has gone into a recession. You have majored in computer science and, because of the
recession, have difficulty in finding a job. Should you go back to school and get a second major? 39)
______

A) No, the recession will most likely be short-lived and I can get a job after it is over.
B) Yes, the recession will lower income in my field permanently.
C) No, the recession will have no impact on my ability to get a job or my future income.
D) Yes, the recession will ensure that you will never find a job as a programmer.

40) The labor force equals the number of people

A) employed. B) in the working-age population.
40) ______

C) employed plus unemployed. D) unemployed.

41) Suppose that homemakers are included as employed in the labor force statistics, rather than being
counted as out of the labor force. This would 41) ______

A) decrease the number of persons in the labor force.

B) decrease the number of persons in the working-age population.
C) increase the measured unemployment rate.
D) increase the measured labor force participation rate.

42) Suppose the working-age population of a fictional economy falls into the following categories: 90 are
retired or homemakers; 60 have full-time employment; 20 have part-time employment; 20 do not have
employment, but are actively looking for employment; and 10 would like employment but do not have
employment and are not actively looking for employment. The official unemployment rate as calculated
by the U.S. Bureau of Labor would equal 42) ______

A) (30/80) × 100. B) (20/80) × 100. C) (20/60) × 100. D) (20/100) × 100.

43) Suppose the government launches a successful advertising campaign that convinces workers with
high school degrees to quit their jobs and become full time college students. This would cause 43)
______

A) no change in the unemployment rate.

B) the labor force participation rate to decrease.
C) the number of discouraged workers to increase.
D) the unemployment rate to decrease.

44) Someone who is available for work but has not actively looked for work in the previous four weeks
would be classified as 44) ______

A) not in the working-age population. B) unemployed.

C) employed. D) not in the labor force.

45) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to
understate the true extent of joblessness? 45) ______

A) unemployed persons falsely report themselves to be actively looking for a job

B) inflation
C) discouraged workers
D) people employed in the underground economy

46) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to
overstate the true extent of joblessness? 46) ______

A) discouraged workers
B) counting people as employed who are working part time, although they would prefer to be working full
time
C) unemployed persons falsely report themselves to be actively looking for a job
D) inflation

47) The advice to "keep searching, there are plenty of jobs around here for which you are qualified",
would be most appropriate for which of the following types of unemployment? 47) ______

A) structural unemployment B) seasonal unemployment

C) frictional unemployment D) cyclical unemployment

48) Cyclical unemployment is the result of

A) a slowdown in the economy.
48) ______

B) the ups and downs in inflation.

C) the search process of matching workers with jobs.
D) a persistent mismatch between the skills and characteristics of workers and the requirements of the
jobs.

49) Structural unemployment is the result of

A) the ups and downs in inflation.
49) ______

B) a slowdown in the economy.

C) a persistent mismatch between the skills and characteristics of workers and the requirements of the
jobs.
D) the search process of matching workers with jobs.

50) In September 2011, Bank of America laid off 30,000 employees. The laid-off employees who were not
able to find jobs at another bank due to a permanent decline in business in the financial industry would
be considered 50) ______

A) frictionally unemployed. B) seasonally unemployed.

C) cyclically unemployed. D) structurally unemployed.

51) According to the text, economists consider full employment to occur when
A) the unemployment rate consists of only frictional and structural unemployment.
51) ______

B) frictional unemployment equals zero.

C) the sum of frictional unemployment and structural unemployment equals zero.
D) everyone who wants a job has a job.

52) If cyclical unemployment is eliminated in the economy, then

A) the unemployment rate is above the natural rate of unemployment.
52) ______

B) the unemployment rate is below the natural rate of unemployment.

C) the economy is at less than full employment.
D) the economy is considered to be at full employment.

53) During the Great Depression, cyclical unemployment increased as the recession continued. This
increase in cyclical unemployment 53) ______

A) decreased the natural rate of unemployment.

B) had no effect on the natural rate of unemployment.
C) could have increased or decreased the natural rate of unemployment.
D) increased the natural rate of unemployment.

54) The advice to "retrain" would be most appropriate for which of the following types of unemployment?
54) ______

A) frictional unemployment B) structural unemployment

C) core unemployment D) cyclical unemployment

55) If the federal government implements programs so that the unemployed are more quickly matched
with jobs, then 55) ______

A) the natural rate of unemployment will increase.

B) the natural rate of unemployment will not change.
C) the natural rate of unemployment will decrease.
D) the natural rate of unemployment could either increase or decrease.

56) An increase in unemployment insurance payments would, in effect, ________ the amount of time spent
searching for a job, which would increase ________ unemployment. 56) ______

A) decrease; cyclical B) increase; frictional

C) increase; cyclical D) decrease; frictional

57) Which of the following policies would reduce structural unemployment?

A) building an on-line job database that helps workers find jobs
57) ______

B) an increase in the minimum wage

C) implementing an unemployment insurance policy
D) a job retraining program

58) Which of the following policies would reduce frictional unemployment?

A) a decrease in the minimum wage
58) ______

B) a job retraining program

C) building an on-line job database that helps workers find jobs
D) implementing an unemployment insurance policy

59) If the minimum wage is set above the market wage,

A) highly-skilled workers will have a harder time finding jobs.
59) ______

B) unemployment will rise.

C) the quantity of labor supplied will be below the quantity of labor demanded.
D) All of the above are correct.

60) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate
over those years would 60) ______

A) decrease. B) increase.
C) remain the same. D) equal 20%.

61) Which of the following is true about the consumer price index?
A) It accounts for people switching to goods whose prices have fallen.
61) ______

B) It assumes that consumers purchase the same amount of each product in the market basket each
month.
C) It filters out the part of price increases that occurs because of quality improvements in products.
D) It frequently updates the price changes of new products added to the market basket, as these have a
tendency to fall.

62) Which of the following would be the best measure of the cost of living?
A) GDP deflator B) real GDP
62) ______

C) real GDP per person D) consumer price index

63) A consumer price index of 160 in 1996 with a base year of 1982-1984 would mean that the cost of the
market basket 63) ______

A) rose 160% from the cost of the market basket in the base year.
B) equaled $160 in 1996.
C) equaled $160 in 1983.
D) rose 60% from the cost of the market basket in the base year.

64) The substitution bias in the consumer price index refers to the idea that consumers ________ the
quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost
of the market basket. 64) ______

A) change; over-estimates B) do not change; under-estimates

C) do not change; over-estimates D) change; under-estimates

65) The producer price index measures the prices that firms
A) pay for imported natural resources that go into the production process.
65) ______

B) receive for the goods and services they use at all stages of production.
C) receive for the goods and services they export.
D) pay for labor, whether or not the labor is foreign or domestic.

66) If your nominal wage rises faster than the price level, we can say your real wage has ________ and the
purchasing power of your income has ________. 66) ______

A) risen; fallen B) risen; risen C) fallen; fallen D) fallen; risen

67) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?
A) -9.5% B) -3.5% C) 1.5% D) 3.5% E) 9.5%
67) ______

68) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus
$100 of interest. If the inflation rate was 7%, what was the real interest rate you paid? 68) ______

A) 17 percent B) 10 percent C) 7 percent D) 3 percent

69) When deflation occurs,

A) the nominal interest rate is equal to the real interest rate and inflation is negative.
69) ______

B) the real interest rate is greater than the nominal interest rate.
C) the nominal interest rate is equal to the real interest rate and inflation is positive.
D) the nominal interest rate is greater than the real interest rate.

70) Suppose that in 2012, all prices in the economy double and that all wages and salaries have also
doubled. In 2012 you 70) ______

A) cannot determine whether you are better off or worse off than you were in 2011, because the
purchasing power of your salary cannot be determined.
B) are no better off or worse off than you were in 2011 as the purchasing power of your salary has
remained the same.
C) are worse off than you were in 2011 as you can no longer afford to buy as many goods and services.
D) are better off than you were in 2011 as your salary is higher than it was in 2011 and you can now buy
more goods and services.

71) Which of the following describes a situation in which the person is hurt by inflation?
A) a retiree whose pension is adjusted for inflation
71) ______

B) a person paid a fixed income during an inflationary period

C) a person who lends money during a period when inflation is over-predicted
D) a person who borrows money during a period when inflation is under-predicted

72) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is
currently 6%. If actual inflation turns out to be 7% over the loan contract period, then 72) ______

A) borrowers gain 1% of the loan value.

B) borrowers lose 3% of the loan value.
C) lenders gain 3% of the loan value.
D) lenders gain 1% of the loan value.

73) When actual inflation is less than expected inflation,

A) borrowers gain and lenders lose. B) borrowers lose and lenders gain.
73) ______

C) borrowers and lenders both gain. D) borrowers and lenders both lose.

74) Which of the following increases labor productivity?

A) decreases in the availability of computers and factory buildings
74) ______
B) inventions of new machinery, equipment, or software
C) a decline in the health of the population
D) an increase in the aggregate hours of work

75) The quantity of goods and services that can be produced by one worker or by one hour of work is
referred to as 75) ______

A) labor productivity. B) human capital.

C) real GDP. D) technology.

76) If labor productivity growth slows down in a country, this means that the growth rate in ________ has
declined. 76) ______

A) labor force participation

B) the working-age population
C) nominal GDP
D) the quantity of goods or services that can be produced by one hour of work

77) Which of the following is an example of human capital?

A) a software program B) a computer
77) ______

C) a college education D) a factory building

78) Which of the following would contribute to a sustained high rate of economic growth in the long run
in an economy? 78) ______

A) a shift of workers in the economy from the agricultural sector to the nonagricultural sector
B) an influx of immigrant labor into an economy without any accompanying technological change
C) increases in labor force participation rates as workers who are out of the labor force pursue rising
wages
D) growth in capital per hour accompanied by technological change

79) Which of the following is not one of the three sources of technological change?
A) better machinery and equipment
79) ______

B) additional amounts of existing capital

C) increases in human capital
D) better means of organizing and managing production

80) Which of the following would you expect to result in faster economic growth?
A) a decrease in the average level of education in the economy
80) ______

B) a decrease in the stock of capital per worker

C) a decrease in research and development spending
D) the invention of new computers that increase labor productivity

81) The term "brain drain" refers to

A) the decreased quality of the college-educated workforce.
81) ______

B) the diminishing returns to studying for an exam.

C) the negative impact on brain function of an individual's overinvestment in human capital.
D) highly educated individuals who leave developing countries for high-income countries.

82) Disease, poor nutrition, and substandard health care in developing nations can reduce growth in an
economy by 82) ______

A) increasing technological change. B) reducing human capital.

C) increasing labor productivity. D) reducing physical capital.

83) Enforcing property rights in an economy will

A) encourage corruption and expand the underground economy.
83) ______

B) raise the level of investment.

C) cause the market system to work less efficiently.
D) decrease the level of foreign portfolio investment.

84) All of the following policies are ways for a country to promote long-run economic growth except
A) imposing stricter regulations to limit foreign direct investment.
84) ______

B) undergoing political reform to decrease corruption.

C) enacting stronger laws to protect property rights.
D) increasing vaccinations against infectious diseases.

85) You are an economic advisor to the president. You are asked to recommend a policy to promote long-
term economic growth in the economy. Which of the following policies would you choose? 85) ______

A) a reduction in taxes on luxury yachts B) an investment tax credit

C) a reduction in sales taxes D) all of the above
1) A
2) D
3) A
4) A
5) D
6) D
7) C
8) B
9) D
10) A
11) C
12) C
13) C
14) C
15) B
16) D
17) D
18) C
19) A
20) A
21) C
22) C
23) A
24) C
25) B
26) A
27) D
28) D
29) C
30) C
31) A
32) B
33) A
34) C
35) D
36) B
37) A
38) B
39) A
40) C
41) D
42) D
43) B
44) D
45) C
46) C
47) C
48) A
49) C
50) D
51) A
52) D
53) B
54) B
55) C
56) B
57) D
58) C
59) B
60) A
61) B
62) D
63) D
64) A
65) B
66) B
67) D
68) D
69) B
70) B
71) B
72) A
73) B
74) B
75) A
76) D
77) C
78) D
79) B
80) D
81) D
82) B
83) B
84) A
85) B