Chapter 5 Introduction to Macroeconomics- Testbank

5.1 Macroeconomic Concerns

1 Multiple Choice

1) Which of the following is NOT a topic studied in Macroeconomics?

A) gross domestic product (GDP)

B) the unemployment rate

C) the price of IBM computers

D) the inflation rate

Answer: C

Answer Explanation: Macroeconomics is the field of Economics that tackles concepts related to the
country or the world as a whole such as unemployment, inflation, deflation, GDP, GNP…

In this case, the price of IBM computers concerns only a specific industry and not the country or the
world as a whole.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

2) Which of the following is a topic studied in Macroeconomics?

A) gross domestic product (GDP)

B) the wage of auto workers

C) the price of IBM computers

D) the amount of pizza produced

Answer: A

Answer Explanation: The wage of auto workers, the price of IBM computers, and the amount of pizza
produced concern only specific industries and not the country or the world as a whole. The GDP on the
other hand is a concept related to the country as a whole.
Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

3) Which of the following is a topic studied in Macroeconomics?

A) the functioning of individual industries

B) aggregate behavior of households and industries

C) the behavior of individual households

D) the decision-making behavior of individual business firms

Answer: B

Answer Explanation: Individual industries, individual households, and individual business firms do not
concern the economy of the country as a whole. Nevertheless, the aggregate behavior of all households
and industries that make up a country definitely concern its economy as a whole.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

4) Prices that do not always adjust rapidly to maintain equality between quantity supplied and

quantity demanded are

A) administered prices.

B) sticky prices.

C) regulatory prices.

D) market prices.

Answer: B

Answer Explanation: By definition, sticky prices tend to either remain unchanged or to adjust slowly
despite the changes in the market.

Diff: 1
Topic: Macroeconomic Concerns

Skill: Definition

5) The demand for corn has increased in May without any change in supply. Eight months later

there still has been no change in corn prices. This is an example of a

A) price floor.

B) price control.

C) sticky price.

D) macroeconomic price.

Answer: C

Answer Explanation: Even with a change in demand in the market, the price stayed the same for at least
8 months. This is an example of a sticky price.

Diff: 2

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

6) The demand for massage therapists declined in the spring of 2007, but the starting wages paid

to massage therapists was still the same at the end of 2007. This is an example of a

A) sticky price.

B) flexible price.

C) highly regulated market.

D) price control.

Answer: A

Answer Explanation: Even with a change in demand in the market, the price (wages) stayed the same for
at least 12 months. This is an example of a sticky price.

Diff: 2

Topic: Macroeconomic Concerns

Skill: Conceptual
AACSB: Reflective Thinking

7) An increase in the overall price level is known as

A) deflation.

B) recession.

C) inflation.

D) stagflation.

Answer: C

Answer Explanation: Inflation rate is the rate at which all prices increase within a certain period of time.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

8) Aggregate behavior is

A) the behavior of each household and firm.

B) the behavior of each individual.

C) the behavior of all households and firms together.

D) none of the above.

Answer: C

Answer Explanation: The definition of the word aggregate in English is “to join into a single group.” Thus,
Aggregate behavior is the behavior of all households and firms together.

Diff: 2

Topic: Macroeconomic Concerns

Skill: Definition

9) Inflation is a(n)

A) decrease in the overall price level.

B) decrease in the overall level of economic activity.

C) increase in the overall price level.

D) increase in the overall level of economic activity.

Answer: C

Answer Explanation: Inflation rate is the rate at which all prices increase within a certain period of time.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

10) Deflation occurs when

A) the average price level declines.

B) economic activity declines.

C) the economic growth rate declines.

D) the unemployment rate declines.

Answer: A

Answer Explanation: Deflation rate is the rate at which all prices decrease within a certain period of
time.

Diff: 2

Topic: Macroeconomic Concerns

Skill: Definition

11) A period of very rapid increase in the overall price level is known as

A) stagnation.

B) hyperinflation.

C) stagflation.

D) depression.

Answer: B

Answer Explanation: When the overall price level increases very rapidly, we say it’s a Hyperinflation.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition
12) The trend of the economy is

A) the long run growth path of the economy.

B) the long run inflation rate.

C) the long run unemployment rate.

D) the short run production capacity of an economy.

Answer: A

Answer Explanation: The trend of a country’s economy is always towards Long-run growth.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

13) The term business cycle refers to the

A) short-term ups and downs in the price level.

B) long-term trends in the price level.

C) short-term ups and downs in the level of economic activity.

D) long-term trends in the level of economic activity.

Answer: C

Answer Explanation: The Business Cycle is a graph representing the economic activity (expansion and
contraction) that take place for a certain period of time (usually short-term).

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

14) A period during which aggregate output rises is known as a(n)

A) recession.

B) inflation.

C) hyperinflation.

D) expansion.
Answer: D

Answer Explanation: Output means production. Thus, a rise in the overall level of production is an
expansion.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

15) A period when the economy shrinks is known as

A) a recession.

B) a contraction.

C) a slump.

D) all of the above.

Answer: D

Answer Explanation: Recession, contraction, and slump all have the same meaning.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

16) In a business cycle, a peak represents the end of ________ and a trough represents the end of

________.

A) an expansion; a recession

B) a depression; an expansion

C) a trough; a peak

D) a recession; an expansion

Answer: A

Answer Explanation: In a graph, the highest point is called the peak, and the lowest is called a trough.
Thus, the peak represents the expansion and the trough represents a contraction.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

17) In a business cycle, a peak represents the end of

A) an expansion.

B) a depression.

C) trough.

D) a recession

Answer: A

Answer Explanation: Since the peak is the highest point of a graph, after that point production will start
decreasing. Thus, the peak represents the end of an expansion.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

18) In a business cycle, a trough represents the end of

A) an expansion.

B) an inflation.

C) a peak

D) a recession.

Answer: D

Answer Explanation: Since the trough is the lowest point of a graph, after that point production will start
increasing. Thus, the trough represents the end of a recession.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

19) It has become conventional to classify an economic downturn as a recession when aggregate

output declines for

A) three consecutive quarters.

B) two consecutive quarters.

C) a year.

D) six consecutive quarters.

Answer: B

Answer Explanation: As a matter of fact, the economy goes through many up and downturns. We can
only say that a downturn becomes a recession when output declines for six months (two consecutive
quarters).

Diff: 1

Topic: Macroeconomic Concerns

Skill: Fact

20) If the labor force is 500 and employment is 450, then the unemployment rate is

A) 100%.

B) 90%.

C) 10%.

D) 0%.

Answer: C

Answer Explanation:

Labor Force= Number of people employed + Number of people unemployed.

Thus, in this case if there are 450 people employed and the whole work force is made up of 500 people,
the number of unemployed is 50.

Unemployment rate= Number of unemployed/Total Labor force= 50/500=0.1=10%

Diff: 2

Topic: Macroeconomic Concerns

Skill: Analytic
21) A prolonged and deep recession is called

A) a business cycle.

B) a depression.

C) a stagflation.

D) hyperinflation.

Answer: B

Answer Explanation: As a matter of fact, when the recession phase is too deep and lasts a long time, it is
called a depression.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

22) Between a trough and a peak, the economy goes through a(n)

A) recession.

B) bust.

C) expansion.

D) hyperinflation.

Answer: C

Answer Explanation: The trough is the lowest point of the graph and the peak is the highest. Going from
the trough to the peak means going from lowest to highest production patterns. This means Expansion.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

23) Between a peak and a trough, the economy goes through a(n)

A) expansion.

B) inflation.

C) recession.
D) boom.

Answer: C

Answer Explanation: The trough is the lowest point of the graph and the peak is the highest. Going from
the peak to the trough means going from highest to lowest production patterns. This means Recession.

This means Contraction/recession.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

24) Unemployment means that

A) at the going wage rate, there are people who want to work but cannot find work.

B) people are not willing to work at the going wage rate.

C) there are some people who will not work at the going wage rate.

D) there is excess demand in the labor market.

Answer: A

Answer Explanation: An unemployed person is one that wants to work but can’t find work. The people
who are not working but are NOT willing to find work and are NOT actively searching for a position,
cannot be considered unemployed.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

25) Unemployment implies that in the labor market

A) there is an excess supply of labor.

B) there is an excess demand for labor.

C) there are too few workers for the jobs available.

D) quantity demanded of labor exceeds quantity supplied.

Answer: A
Answer Explanation: Since Unemployment means that there are people who want to work but cannot
find work, this means that they cannot find work because there is an excess of people are working (thus
excess supply of labor).

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

26) The unemployment rate equals

A) labor force/population.

B) unemployed/employed.

C) (employed - unemployed)/labor force.

D) (labor force - employed)/labor force.

Answer: D

Answer Explanation:

Unemployment rate= Number of people unemployed/Labor Force

Labor Force= Number of unemployed + Number of employed

Number of unemployed= Labor Force-Number of employed

Thus, Unemployment rate= (Labor Force-Number of employed)/Labor Force

Diff: 2

Topic: Macroeconomic Concerns

Skill: Definition

27) The unemployment rate equals

A) labor force/population.

B) unemployed/employed.

C) (employed - unemployed)/labor force.

D) unemployed/labor force.
Answer: D

Answer Explanation: Unemployment rate= Number of people unemployed/Labor Force

Diff: 2

Topic: Macroeconomic Concerns

Skill: Definition

28) If the labor force is 50 million and 48 million are employed then the unemployment rate is:

A) 2%.

B) 4%.

C) 5%.

D) 52%.

Answer: B

Answer Explanation:

Labor Force= Number of people employed + Number of people unemployed.

Thus, in this case if there are 48 million people employed and the whole work force is made up of 50
million people, the number of unemployed is 2 million

Unemployment rate= Number of unemployed/Total Labor force= 2 million/ 50 million= 0.04= 4%

Diff: 2

Topic: Macroeconomic Concerns

Skill: Analytic

AACSB: Analytic Skills

29) If 20 million workers are unemployed and 180 million workers are employed, then the

unemployment rate is

A) 10%.

B) 11.1%.

C) 18%.

D) 80%.

Answer: A
Answer Explanation:

Labor Force= Number of people employed + Number of people unemployed= 180 million + 20 million=
200 million.

Unemployment rate= Number of unemployed/Total Labor force= 20 million/ 200 million= 0.1= 10%

Diff: 2

Topic: Macroeconomic Concerns

Skill: Analytic

AACSB: Analytic Skills

30) The period in the business cycle from a trough to peak is called a(n)

A) recession.

B) expansion.

C) slump.

D) depression.

Answer: B

Answer Explanation:

The trough is the lowest point of the graph and the peak is the highest. Going from the trough to the
peak means going from lowest to highest production patterns. This means Expansion.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

31) If output is rising and unemployment is falling, the economy MUST be in a(n)

A) contraction.

B) expansion.

C) depression.

D) hyperinflationary period.

Answer: B

Answer Explanation: If production (output has to do with production) is rising, and the rate of
unemployment is falling, then we are going through a period of expansion.
Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

32) The period in the business cycle from a peak to a trough is a(n)

A) recession.

B) boom.

C) expansion.

D) inflation.

Answer: A

Answer Explanation: The trough is the lowest point of the graph and the peak is the highest. Going from
the peak to the trough means going from highest to lowest production patterns. This means recession.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

33) Unemployment generally ________ during recessions and ________ during expansions.

A) falls; rises.

B) falls; falls.

C) rises; falls.

D) rises; rises.

Answer: C

Answer Explanation: Usually during recessions more people become unemployed while during
expansions, since the production rises more people are likely to be hired and unemployment tends to
fall.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

34) Which of the following statements is FALSE?

A) The rate of change in economic activity is used to assess whether an economy is

expanding or contracting.

B) Short-term ups and downs in the economy are known as business cycles.

C) During a recession, output and employment are falling.

D) Business cycles are always symmetric: the length of an expansion is the same as the

length of a contraction.

Answer: D

Answer Explanation: There is nothing that says that Business cycles should be symmetric. On the
contrary actually, since we would logically want the expansions to be longer and more frequent than the
contractions.

Diff: 2

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

2 True/False

1) Macroeconomics is concerned with inflation or deflation, output growth and unemployment.

Answer: TRUE

Answer Explanation: Macroeconomics is the field of Economics that tackles concepts related to the
country or the world as a whole such as unemployment, inflation, deflation, GDP, GNP, output growth…

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

2) Macroeconomics is concerned with the market price and equilibrium quantity of each good or

service.
Answer: FALSE

Answer Explanation: Topics related to market price and equilibrium quantity for each good or service
are related to MICROeconomics. Topics related to the AGGREGATE Market price or AGGREGATE
Equilibrium are related to MACROEconomics.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

3) The employment rate is the number of people employed divided by number of people in the

labor force.

Answer: TRUE

Answer Explanation:

Just as Unemployment rate= Number of people unemployed/Total number of people in the labor force,

Employment rate= Number of people employed/Total number of people in the labor force.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

4) Hyperinflation and stagflation are two different names which refer to identical economic

conditions.

Answer: FALSE

Answer Explanation: Hyperinflation takes place when the price of all goods and services rises
unstoppably for a well-defined period of time. Stagflation takes place when in addition to a high
inflation, low economic growth, and high unemployment exist.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Definition

5) Macroeconomic behavior is the sum of all the microeconomic decisions made by individual
households and firms.

Answer: TRUE

Answer Explanation: Macroeconomics is the field of Economics that tackles concepts related to the
country or the world as a whole while Microeconomics is the field of Economics that tackles individual
households and firms. A sum of all the microeconomic decisions made by individual households and
firms is dealt with by Macroeconomics.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

6) All business cycles are symmetric: the length of an expansion is the same as the length of a

recession.

Answer: FALSE

Answer Explanation: There is nothing that says that Business cycles should be symmetric. On the
contrary actually, since we would logically want the expansions to be longer and more frequent than the
contractions.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

7) The following is a correct order in a business cycle: recession, trough, peak, expansion.

Answer: FALSE

Answer Explanation: The correct order in a business cycle is expansion, peak, recession, and trough.

That is, Economy expands to reach peak and then contracts to reach the trough.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

8) A recession is usually associated with increasing unemployment.

Answer: TRUE

Answer Explanation: During recessions jobs become scarcer.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

9) An expansion is usually associated with rising price levels.

Answer: TRUE

Answer Explanation: Expansion is the overall increase in the production and supply of outputs, thus
rising the overall price levels.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

10) A recession is associated with a negative rate of growth of the economy.

Answer: TRUE

Answer Explanation: That is because during a recession the economy shrinks rather than growing.

Diff: 1

Topic: Macroeconomic Concerns

Skill: Conceptual

AACSB: Reflective Thinking

5.2 The Components of the Macroeconomy

1 Multiple Choice

1) If the central bank decreases the money supply, it is conducting

A) monetary policy.

B) supply-side policy.

C) fiscal policy.

D) incomes policy.

Answer: A

Answer Explanation: Any policy or action created by the central bank is called a monetary policy.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

2) If Congress increases government spending, it is using

A) monetary policy.

B) supply-side policy.

C) fiscal policy.

D) incomes policy.

Answer: C

Answer Explanation: Any policy or action created by the government (congress) is called a fiscal policy.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

3) Government policies regarding taxes and expenditures are called

A) fiscal policy.

B) income policies.

C) supply-side policy.

D) monetary policy.

Answer: A

Answer Explanation: Any policy or action created by the government (congress) is called a fiscal policy.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

4) The government implements fiscal policy when it changes

A) spending and/or interest rate.

B) money supply and/or taxes.

C) taxes and/or spending.

D) taxes and/or interest rate.

Answer: C

Answer Explanation: Fiscal policies have nothing to do with the money supply or interest rate. Instead,
they deal with taxes and spending.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

5) The government wants to encourage consumer spending through cutting income taxes. This is

an example of

A) an incomes policy.

B) a fiscal policy.

C) a supply-side policy.
D) a monetary policy.

Answer: B

Answer Explanation: Three key terms help us to identify a fiscal policy in this case: Government,
spending, and taxes.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

6) The ________ can change the quantity of money in the economy.

A) Treasury Department

B) Federal Reserve

C) Congress

D) Office of the Comptroller of the Currency

Answer: B

Answer Explanation: The Federal Reserve is the Central Bank of the United States. Any policy or action
created by the central bank is called a monetary policy and tackles a change in the quantity of money
supplied or in the interest rate.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Fact

7) The Federal Reserve affecting the supply of money is known as

A) fiscal policy.

B) monetary policy.

C) growth policy.

D) supply side policy.

Answer: B
Answer Explanation: The Federal Reserve is the Central Bank of the United States. Any policy or action
created by the central bank is called a monetary policy and tackles a change in the quantity of money
supplied or in the interest rate.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

8) Policies designed to affect the quantity of money are

A) fiscal policies.

B) supply side or growth policies.

C) government spending policies.

D) monetary policies.

Answer: D

Answer Explanation: Any policy or action created by the central bank is called a monetary policy and
tackles a change in the quantity of money supplied or in the interest rate.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

9) The diagram that shows the income received and payments made by each sector of the

economy is the

A) aggregate demand-aggregate supply diagram.

B) circular flow diagram.

C) income flow diagram.

D) income-production diagram.

Answer: B

Answer Explanation: A circular flow diagram is the name given for the visual representation that shows
the income received and payments made by each sector. Below is an example of a circular flow diagram
from the website: https://ilearnthis.com/a/circular-flow-diagram/
Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

10) In the circular flow diagram, the different payments made by firms to households include

A) wages and profits.

B) interest and taxes.

C) transfer payments and dividends.

D) taxes and transfer payments.

Answer: A

Answer Explanation: Members of the households are the ones who work at the firms and will receive
wages (salaries) and profits in return.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

11) An example of a transfer payment is

A) an interest payment on a General Motorsʹ bond.

B) the added value of stock from the time it was bought to the time it was sold.

C) a Social Security retirement benefit.

D) the salary paid to a member of the armed forces.

Answer: C

Answer Explanation: A transfer payment is a cash payment made by the government to people who do
not supply goods, services or labor in exchange for this payment.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

12) A transfer payment is

A) a bonus to get a worker to accept a transfer.

B) a cash payment made by the government to people who do not supply goods, services or

labor in exchange for the payment.

C) a cash payment for transferring a good from one person to another.

D) an in-kind payment for working ʺoff the books. ʺ

Answer: B
Diff: 2

Topic: The Components of the Macroeconomy

Skill: Definition

13) A household that spends less than it receives in income during a given period is

A) saving.

B) dissaving.

C) running a deficit.

D) receiving transfer payments.

Answer: A

Answer Explanation: Let’s suppose a household receives an income of $1500 per month but spends
$1000. In other words, it spends less than what it receives and it saves 1500-1000= $500.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

14) The major lesson of the circular flow diagram is that

A) saving must always be less than investment.

B) taxes must always be greater than government expenditures.

C) total income in the economy must always equal total spending.

D) tax receipts must be equal to transfer payments

Answer: C

Answer Explanation: Every dollar that a certain buyer spends is a dollar of income that the seller will
receive. Thus, total income in the economy must always equal total spending.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

15) In which of the following markets are funds demanded and supplied?

A) the labor market

B) the goods and services market

C) the money market

D) the factor market

Answer: C

Answer Explanation: Since we are dealing with funds (money) being demanded and supplied, then the
corresponding market is the money market.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

16) In the goods-and-services market, households

A) only supply.

B) only demand.

C) both supply and demand.

D) neither supply nor demand.

Answer: B

Answer Explanation: In the goods-and-services market, households only demand for products. That is,
they purchase (demand) the goods and services that businesses are willing to sell. Households don’t sell
products meaning that we cannot consider them as suppliers.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

17) The demanders in the goods-and-services market are

A) households and business firms.

B) households, the government, and the rest of the world.

C) the government and business firms.

D) households, the government, business firms, and the rest of the world.

Answer: D

Answer Explanation: In the goods and services market, households demand many different goods (such
as food, cars, clothes…) and services (such as food delivery, schools, haircuts…). In addition, the
government also demand goods (such as office supplies and equipment) and services (such as teaching
in public schools, public health workers…). Lastly, Business firms and the rest of the world demand
goods (such as supplies that will be resold) and services (such as employees working for the firms) from
the goods-and-services market as well.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

18) In which basic market would DVDs be traded?

A) the goods and services market

B) the money market

C) the labor market

D) the factor market

Answer: A

Answer Explanation: DVDs are a product. Thus, they are traded only in the goods and services market.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

19) In the circular flow diagram, firms ________ labor and households ________ goods and

services.

A) demand; supply.

B) demand; demand.

C) supply; demand.
D) supply; supply.

Answer: B

Answer Explanation: Firms need employees to work for them (in other words, they demand labor).
Households buy goods and services (in other words, they demand goods and services).

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

20) In the circular flow diagram, households demand ________ and supply ________.

A) labor; labor.

B) goods; services.

C) goods and services; labor.

D) labor; goods and services.

Answer: C

Answer Explanation: People living in the households need goods and services. These people also work
for many different companies. Therefore, households demand goods and services and supply labor to
business firms.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

21) Promissory notes issued by the federal government when it borrows money are known as

A) Treasury shares.

B) Treasury stocks.

C) Treasury bonds.

D) none of the above

Answer: C
Answer Explanation: As a rule of thumb, every time we speak about borrowing we use the word “bonds”
and whenever we speak about ownership we either use the word “stocks” or the word “shares.” Lastly,
when speaking about government, we use “treasury.”

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Definition

22) A promissory note issued by a corporation when it borrows money is a

A) share.

B) corporate bond.

C) corporate dividend.

D) stock.

Answer: B

Answer Explanation: As a rule of thumb, every time we speak about borrowing we use the word “bonds”
and whenever we speak about ownership we either use the word “stocks” or the word “shares.” Lastly,
when speaking about corporation, we use “corporate.”

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

23) Dividends are

A) government profits distributed among bondholders.

B) corporate profits distributed among shareholders.

C) capital gains realized by stockholders.

D) promissory notes issued by corporations.

Answer: B

Answer Explanation: To begin with, how does a corporation raise money to acquire assets and perform
its everyday functions? Well, a company can either borrow the money and later repay back this money
plus an extra amount of money called interest, or it can sell stocks (also called shares). Selling stocks
means selling the ownership of a small part of the corporation. In other words, the buyer of the stock
pays money that will be used for the company in exchange for a certain amount of ownership to the
company. In addition to this ownership, the shareholder may or may not (depending on pre-established
terms) receive monthly payments called dividends. Dividends are a part of the company’s profits that
are distributed to the shareholders.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

24) Which of the following is a CORRECT statement?

A) Companies issue shares but don’t issue bonds.

B) The government issues both bonds and shares.

C) Bondholders earn dividends but shareholders don’t.

D) Shareholders earn dividends but bondholders don’t.

Answer: D

Answer Explanation: Shareholders earn dividends and bondholders earn interest.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

25) A capital gain is

A) a financial instrument that gives the holder a share in the ownership of a firm and

therefore, the right to share in the profits of the firm.

B) the portion of a corporation’s profits that the firm pays out each period to its

shareholders.

C) an increase in the value of an asset over the price initially paid for it.

D) the difference between an individual’s economic income and money income.

Answer: C

Answer Explanation: A capital gain is the increase in the value of an asset previously bought. For
example, if the asset costed $100 but now is worth $150, we have a capital gain of $50.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Definition

26) An increase in the value of an asset over the price initially paid for it is a

A) dividend.

B) share of stock.

C) promissory note.

D) capital gain.

Answer: D

Answer Explanation: See Question 25.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Definition

27) If Tomas purchases a share of stock for $150 and one year later sells it for $225, he will realize a

A) dividend of $75.

B) capital gain of $75.

C) dividend of $225.

D) a capital gain of $225

Answer: B

Answer Explanation: 225-150= $75

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Analytic

AACSB: Analytic Skills

28) If Juanita purchases a share of stock for $20 and three years later sells it for $120, she will

realize a

A) dividend of $100.

B) capital gain of $100.

C) dividend of $120.

D) capital gain of $140.

Answer: B

Answer Explanation: 120-20= $100

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Analytic

AACSB: Analytic Skills

29) Wayne purchased 10 autographed Eli Manning football cards when he was 15 years old for a

total cost of $50 and then sold those football cards 4 years later for $800. Due to these

transactions

A) Wayne earned a capital gain of $800.

B) Wayne earned a capital gain of $750.

C) Wayne earned a dividend of $800.

D) Wayne earned a dividend of $750.

Answer: B

Answer Explanation: 800-50= $750.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Analytic

AACSB: Analytic Skills

30) Mike purchased a 1968 Chevy Corvette in 2006 for $30,000 and a year later he sold it for

$36,000. Due to these transactions

A) Mike earned a capital loss of $6,000.

B) Mike earned a dividend of $36,000.

C) Mike earned a dividend of $600.

D) Mike earned a capital gain of $6,000.

Answer: D

Answer Explanation: 36,000-30,000= $6,000

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Analytic

AACSB: Analytic Skills

31) Ami purchased 100 shares of stock for $10,000. A year later the stock is valued at $18,000.

Instead of selling the stock, Ami held onto it for another year. Which of the following is TRUE?

A) The $8,000 increase in the value of the stock represents an unrealized capital gain.

B) The $8,000 increase in the value of the stock represents a dividend.

C) To determine the capital gain, it is first necessary to know the normal rate of return on

capital.

D) none of the above

Answer: A

Answer Explanation: 18,000-10,000= $8,000.

Since Ami did not sell the stock, we call this capital gain “unrealized capital gain.”

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Analytic

AACSB: Analytic Skills

32) A dividend is

A) a promissory note issued by corporations when they borrow money.

B) an increase in the value of an asset over the purchase price initially paid for it.

C) the difference between the interest rate a bank pays on deposits and the interest rate it

charges for loans.

D) the portion of a corporation’s profits that the firm pays out each period to its
shareholders.

Answer: D

Answer Explanation: To begin with, how does a corporation raise money to acquire assets and perform
its everyday functions? Well, a company can either borrow the money and later repay back this money
plus an extra amount of money called interest, or it can sell stocks (also called shares). Selling stocks
means selling the ownership of a small part of the corporation. In other words, the buyer of the stock
pays money that will be used for the company in exchange for a certain amount of ownership to the
company. In addition to this ownership, the shareholder may or may not (depending on pre-established
terms) receive monthly payments called dividends. Dividends are a part of the company’s profits that
are distributed to the shareholders.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

33) The portion of a corporation’s profits that a firm pays out each period to its shareholders is a

A) dividend.

B) promissory note.

C) capital gain.

D) corporate bond.

Answer: A

Answer Explanation: To begin with, how does a corporation raise money to acquire assets and perform
its everyday functions? Well, a company can either borrow the money and later repay back this money
plus an extra amount of money called interest, or it can sell stocks (also called shares). Selling stocks
means selling the ownership of a small part of the corporation. In other words, the buyer of the stock
pays money that will be used for the company in exchange for a certain amount of ownership to the
company. In addition to this ownership, the shareholder may or may not (depending on pre-established
terms) receive monthly payments called dividends. Dividends are a part of the company’s profits that
are distributed to the shareholders.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition
2 True/False

1) Fiscal policy generally takes the form of regulations specifying the maximum amount by

which the money supply can be changed.

Answer: FALSE

Answer Explanation: Fiscal policies have nothing to do with the money supply. Monetary policies are the
ones dealing with it.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

2) Contractionary fiscal policy includes raising taxes.

Answer: TRUE

Answer Explanation: Any policy or action created by the government (congress) is called a fiscal policy.
Fiscal policies have nothing to do with the money supply or interest rate. Instead, they deal with taxes
and spending. The word Contractionary means to shorten. Thus, through a contractionary fiscal policy,
we are shortening spending and increasing taxes.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

3) Monetary policy includes changing the level of household taxes.

Answer: FALSE

Answer Explanation: Monetary policies have nothing to do with the taxes and spending. Instead, they
deal with the money supply or interest rate.

Diff: 2

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

4) A corporate bond is a promissory note issued by a firm when it borrows money.

Answer: TRUE

Answer Explanation: As a rule of thumb, every time we speak about borrowing we use the word “bonds”
and whenever we speak about ownership we either use the word “stocks” or the word “shares.” Lastly,
when speaking about corporation, we use “corporate.”

Answer Explanation:

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

5) In the circular flow diagram everyone’s expenditure is someone else’s receipt.

Answer: TRUE

Answer Explanation: Every dollar that a certain buyer spends is a dollar of income that the seller will
receive. Thus, total income in the economy must always equal total spending and everyone’s
expenditure is someone else’s receipt.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Conceptual

AACSB: Reflective Thinking

6) A dividend is paid by shareholders to firms.

Answer: FALSE

Answer Explanation: A dividend is paid by the firm to the shareholders and not the other way around.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

7) A transfer payment is the tax one pays when transferring real estate.

Answer: FALSE
Answer Explanation: transfer payment is a cash payment made by the government to people who do
not supply goods, services or labor in exchange for that payment.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

8) A capital gain is the increase in value of an asset above its initial cost.

Answer: TRUE

Answer Explanation: A capital gain is the increase in the value of an asset previously bought. For
example, if the asset costed $100 but now is worth $150, we have a capital gain of $50.

Diff: 1

Topic: The Components of the Macroeconomy

Skill: Definition

5.3 A Brief History of Macroeconomics

1 Multiple Choice

1) To get the economy out of a slump, Keynes believed that the government should

A) cut both taxes and government spending.

B) increase both taxes and government spending.

C) increase taxes and/or decrease government spending.

D) decrease taxes and/or increase government spending.

Answer: D

Answer Explanation: A slump means a “bad state.” As we know, the government uses fiscal policies.
Fiscal policies are policies that deal with spending and with taxes. To get out of a slump, the government
should either decrease the taxes it imposes, or increase the amount of money it spends on the
population.

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Fact

AACSB: Reflective Thinking

2) To bring the economy out of an inflationary period, Keynes argued that the government

should

A) cut both taxes and government spending.

B) increase both taxes and government spending.

C) increase taxes and/or decrease government spending.

D) decrease taxes and/or increase government spending.

Answer: C

Answer Explanation: According to Keynes, inflation is caused by an increased supply of money. To bring
the economy out of an inflationary period (which is characterized by an overall rise in prices and in
production), the government has to increase taxes and decrease the amount it spends (since these
actions will decrease the amount of money circulation around).

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Conceptual

AACSB: Reflective Thinking

3) Which of the following is an assumption used by Classical economists?

A) Wages adjust downward but not upward.

B) Wages adjust upward but not downward.

C) Wages are inflexible.

D) Wages adjust both upward and downward.

Answer: D

Answer Explanation: The main idea behind classical economics is that free markets can regulate
themselves. This is because in a free market economy, people act in their own self-interest, causing
prices/wages to rise or fall so that supply and demand will always return to equilibrium.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact

4) According to the Classical model, unemployment

A) could not persist because wages would rise to eliminate the excess supply of labor.

B) could not persist because wages would fall to eliminate the excess supply of labor.

C) could be eliminated through fiscal and monetary policies.

D) could be eliminated only through government intervention.

Answer: B

Answer Explanation: The main idea behind classical economics is that free markets can regulate
themselves. This is because in a free market economy, people act in their own self-interest, causing
prices/wages to rise or fall so that supply and demand will always return to equilibrium. Therefore, in
case of unemployment (which takes place because there is an excessive number of people willing to
work, meaning excess supply of labor), the best way to remove this excess is to decrease wages. Since
classical economy believes that free markets can regulate themselves, according to this model,
unemployment could not persist because wages would fall by themselves in order to eliminate the
excess supply of labor.

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Fact

5) According to Classical economists, if the quantity of labor demanded exceeds the quantity

supplied, there is a

A) surplus of labor and wages will rise.

B) shortage of labor and wages will fall.

C) shortage of labor and wages will rise.

D) surplus of labor and wages will fall.

Answer: C

Answer Explanation: If the quantity of labor demanded exceeds the quantity supplied, this means that
firms are demanding people to work but there are not enough people working to fulfill these roles.
Thus, there is a shortage of labor and in order to solve this issue, wages will rise so as to attract more
workers.

Diff: 2
Topic: A Brief History of Macroeconomics

Skill: Fact

6) According to the Classical economists, the economy

A) requires fine-tuning to reach full employment.

B) has sticky prices in many industries.

C) is self-correcting.

D) will never be at full employment.

Answer: C

Answer Explanation: Self-correcting means self-regulating. The main idea behind classical economics is
that free markets can regulate themselves. This is because in a free market economy, people act in their
own self-interest, causing prices/wages to rise or fall so that supply and demand will always return to
equilibrium.

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Fact

7) Macroeconomic policies became more influenced by Keynesʹ theories starting with,

A) the period of high unemployment and high inflation in the 1970s.

B) the Great Depression.

C) the period of high inflation in the early 1980s.

D) the OPEC recession.

Answer: B

Answer Explanation: During the Great Depression of the 1930s, existing classical economic theory was
unable to explain the causes of the severe worldwide economic collapse. In addition, the economy back
then was not being able to regulate itself to overcome unemployment. Keynes’ theory suggests that
government intervention stabilizes the economy.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact
8) According to Classical models, the level of employment is determined primarily by

A) the level of aggregate demand for goods and services.

B) prices and wages.

C) government taxation.

D) government spending.

Answer: B

Answer Explanation: Level of employment means the supply of labor. According to Classical model, the
supply of labor is determined by the price and wages. The higher the wages, the higher the supply of
labor (as in people willing to work).

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Fact

9) According to Keynes, the level of employment is determined by

A) flexible wages and prices.

B) interest rates.

C) price and wages.

D) the level of aggregate demand for goods and services.

Answer: D

Answer Explanation: Keynes’ theory suggests that government intervention stabilizes the economy.
According to Keynes’s theory, aggregate demand (as in the sum of spending by households, businesses,
and the government) is the most important driving force in an economy to achieve employment and
price stability.

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Fact

10) The concept of ʺmarket clearingʺ is adopted and defended by

A) Keynesian economists.

B) Classical economists.
C) fine-tuning economists.

D) demand-side economists.

Answer: B

Answer Explanation: The concept of Market clearing is the process by which the economy regulates
itself to reach a point in which the quantity demanded of a good is equal to the quantity that can be
supplied of it. Since we are speaking about the economy regulating itself, this means that the concept is
adopted and defended by Classical Economists.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact

11) Suppose the economy suffers a high rate of unemployment. According to Keynesian

economists, the government should increase employment by

A) decreasing money supply.

B) balancing the budget.

C) not doing anything.

D) increasing government spending.

Answer: D

Answer Explanation: Government interventions are mainly about changing government spending or
changing taxes.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Conceptual

AACSB: Reflective Thinking

12) Which of the following would be an example of fine tuning?

A) Firms increase wages to attract high-quality workers.

B) Firms increase employment benefits to increase workersʹ productivity.

C) The federal government enacts legislation to increase spending to try to stimulate the

economy.
D) The federal government passes legislation that would require that the government’s

budget always be balanced.

Answer: C

Answer explanation: Fine tuning is a change in either monetary or fiscal policy designed to gradually
manage the level of aggregate demand and prices. In this case, an increase in the government spending
is a great example of an action that will gradually manage the level of aggregate demand and prices.

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Conceptual

AACSB: Reflective Thinking

13) Rapid increases in the price level during periods of recession or high unemployment are

known as

A) stagflation.

B) stagnation.

C) depression.

D) inflation.

Answer: A

Answer Explanation: A very fast increase in the price level and/or in unemployment is called stagflation.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Definition

14) Stagflation occurs when the economy’s inflation rate is high and

A) employment is high.

B) the unemployment rate is high.

C) the unemployment rate is low.

D) the rate of change in economic activities is positive.

Answer: B
Answer Explanation: A very fast increase in the price level and/or in unemployment is called stagflation.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Definition

15) Related to the Economics in Practice on p. 97 [409]: F. Scott Fitzgerald’s The Great Gatsby is set in

the ʺRoaring ʹ20sʺ. This decade in U.S. history was characterized by

A) economic expansion and high unemployment.

B) recession and high unemployment.

C) economic expansion and low unemployment.

D) the Great Depression and stagflation.

Answer: C

Answer Explanation: From 1920 up until August 1929, we had what we call the Roaring’ 20s. This decade
was a period of amazing joy to the majority of Americans since the economy was booming. It was
characterized by economic expansion and low unemployment.

Diff: 2

Topic: A Brief History of Macroeconomics: Economics in Practice

Skill: Fact

16) Related to the Economics in Practice on p. 97 [409]: John Steinbeck’s The Grapes of Wrath is set in

the early 1930s. During this time, the U.S. economy was primarily in the ________ phase of the

business cycle, culminating in the Great Depression.

A) peak

B) recession

C) trough

D) expansion

Answer: B

Answer Explanation: The longest and deepest downturn in the U.S. Economy took place from August
1929 up until 1941. This period was called the Great Depression. The Great Depression was a severe
global economic downturn that affected not only the U.S but also many countries across the world. The
beginning of the Great depression was what we call the recession period.

Diff: 2

Topic: A Brief History of Macroeconomics: Economics in Practice

Skill: Fact

17) Related to the Economics in Practice on p. 99 [411]: John Maynard Keynesʹ most notable

published work is entitled

A) Capitalism Doomed.

B) The General Theory of Employment, Interest, and Money.

C) The Communist Manifesto.

D) Freakonomics.

Answer: B

Answer Explanation: John Maynard Keynesʹ most notable published work is entitled The General Theory
of Employment, Interest, and Money.

Diff: 2

Topic: A Brief History of Macroeconomics: Economics in Practice

Skill: Fact

18) Related to the Economics in Practice on p. 99 [411]: John Maynard Keynes sought to solve the

economic paradox of the Great Depression, which was the coexistence of

A) low production and low unemployment.

B) high production and low inflation.

C) high production and high inflation.

D) low production and high unemployment.

Answer: D

Answer Explanation: The existence of Low production and high unemployment altogether is a paradox
since we would think that with low production, firms would need to increase production by hiring more
workers thus decreasing unemployment rather than increasing it.

Diff: 2
Topic: A Brief History of Macroeconomics: Economics in Practice

Skill: Fact

2 True/False

1) Keynes believed that expansionary fiscal policy could help get an economy out of an inflation.

Answer: FALSE

Answer Explanation: According to Keynes, inflation is caused by an increased supply of money. To bring
the economy out of an inflationary period (which is characterized by an overall rise in prices and in
production), the government has to increase taxes and decrease the amount it spends (since these
actions will decrease the amount of money circulation around). Increasing taxes and decreasing
spending is called a contractionary fiscal policy.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact

2) According to the Classical model, an excess supply of labor would drive up wages to a new

equilibrium level and therefore unemployment would not persist.

Answer: FALSE

Answer Explanation: Excess supply of labor drives the wages down, in order to decrease the number of
people willing to work.

Diff: 2

Topic: A Brief History of Macroeconomics

Skill: Fact

3) According to Keynes, aggregate supply determines the level of economic activities in the

economy.

Answer: FALSE

Answer Explanation: According to Keynes, aggregate DEMAND determines the level of economic
activities in the economy.

Diff: 1
Topic: A Brief History of Macroeconomics

Skill: Fact

4) According to Keynes, the government’s role during periods when private demand is low is to

stimulate aggregate demand and, by so doing, lift the economy out of recession.

Answer: TRUE

Answer Explanation: First of all, according to Keynes the government intervention stabilizes the
economy and aggregate DEMAND determines the level of economic activities in the economy. When
demand is low, the government should act to stimulate aggregate (which means overall) demand in
order to lift the economy out of a recession.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact

5) In the Classical model, the level of employment is determined by the level of aggregate

demand.

Answer: FALSE

Answer Explanation: Level of employment means the supply of labor. According to Classical model, the
supply of labor is determined by the price and wages. The higher the wages, the higher the supply of
labor (as in people willing to work).

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact

6) ʺFine tuningʺ is any government attempt to regulate inflation or unemployment.

Answer: TRUE

Answer Explanation: Fine tuning is a change in either monetary or fiscal policy designed to gradually
manage the level of aggregate demand and prices in an attempt to regulate inflation or unemployment.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Definition
7) Classical economists believed that economic slowdowns are self-correcting.

Answer: TRUE

Answer Explanation: Self-correcting means self-regulating. The main idea behind classical economics is
that free markets can regulate themselves. This is because in a free market economy, people act in their
own self-interest, causing prices/wages to rise or fall so that supply and demand will always return to
equilibrium.

Diff: 1

Topic: A Brief History of Macroeconomics

Skill: Fact

5.4 The U.S. Economy Since 1970

1 Multiple Choice

1) Since 1970, the U.S. economy has experienced five

A) periods of high inflation.

B) recessions.

C) deflations.

D) periods of stagflation.

Answer: B

Answer Explanation:

List of the recessions in the U.S. Economy since 1970

1. 1974-1975
2. 1980-1982
3. 1990-1991
4. 2001
5. 2008-2009

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact
2) Since 1970, the U.S. economy has experienced two

A) periods of high inflation.

B) recessions.

C) deflations.

D) all of the above

Answer: A

Answer Explanation:

List of the high inflation periods in the U.S. Economy since 1970

1. 1973-1975
2. 1979-1981

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact

3) During the U.S. recession of 1980-1982, the unemployment rate reached a high of ________

percent.

A) 7.6

B) 8.8

C) 10.7

D) 22.4

Answer: C

Answer Explanation: During the 1980–1982 recession, unemployment rate reached a maximum of 10.7
percent in the fourth quarter of 1982.

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact
4) In the U.S. economy, the inflation rate in 1975 peaked at ________ percent.

A) 10.1

B) 11.0

C) 14.2

D) 22.4

Answer: B

Answer Explanation: In the first high inflation period since 1970 (1973-1975), the inflation rate peaked at
11.1 percent in the first quarter of 1975.

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact

Refer to the information for this hypothetical economy provided in Table 5.1 below to answer the
questions that follow.

Table 5.1

Year 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008
Quarter I II III IV I II III IV I II III IV
Output 90 94 98 102 96 91 88 84 87 94 90 87

5) Refer to Table 5.1. In this economy, a trough existed around the

A) fourth quarter of the year 2007

B) fourth quarter of the year 2006.

C) second quarter of the year 2007.

D) third quarter of the year 2008.

Answer: A

Answer Explanation: A trough is the lowest point located between 2 higher points in a graph. In the
table given above, we are not sure if 90 is a trough since we don’t know what comes before it. The graph
then increases to 94, 98, 102. Since it is increasing, no trough is found until now. After 102, it starts
decreasing to 96, 91, 88, 84. If we analyze 84, we see that the number that comes before it is 88 and the
one that comes after is 87. Since 84 is between 2 numbers bigger than it, 84 is a trough. In this case, it is
located on quarter IV of 2007. After 84, the points increase again to 87, 94 and then decrease to 90, and
finally 87. Since there is no point after 87, we are not sure if it is a trough or not.

Diff: 2
Topic: The U.S. Economy Since 1970

Skill: Analytic

AACSB: Analytic Skills

6) Refer to Table 5.1. In this economy, a peak existed around the

A) third quarter of the year 2008.

B) third quarter of the year 2006.

C) fourth quarter of the year 2007.

D) fourth quarter of the year 2006.

Answer: D

Answer Explanation: A peak is the highest point located between 2 lower points in a graph. In the table
given above, 90, 94, and 98 are not the peaks since a higher point always comes after them (as in 94
comes after 90, 98 comes after 94, and 102 comes after 98). After 102, the graph starts decreasing to 96,
91, 88, 84. If we analyze 102, we see that the number that comes before it is 98 and the one that comes
after is 96. Since 102 is between 2 numbers smaller than it, 102 is a peak. In this case, it is located on
quarter IV of 2006. After 84, the points increase again to 87, 94 and then decrease to 90, and finally 87.
If we analyze 94, we see that the number that comes before it is 87 and the one that comes after is 90.
Since 94 is between 2 numbers smaller than it, then 94 is another peak. In this case, it is located on
quarter II of 200.

Diff: 2

Topic: The U.S. Economy Since 1970

Skill: Analytic

AACSB: Analytic Skills

7) Refer to Table 5.1. The period from after the fourth quarter of 2006 until before the first quarter

of 2008 can be categorized as a period of

A) high inflation.

B) low unemployment.

C) high production.

D) high unemployment.

Answer: D
Answer Explanation: The period after the fourth quarter of 2006 up until before the first quarter of 2008
is the year of 2007. We see that the level of output goes from 102 in the fourth quarter of 2006 to 96 in
the first quarter of 2007. Throughout 2007 it continues to decrease every quarter. This means that we
had a period of very high unemployment.

Diff: 2

Topic: The U.S. Economy Since 1970

Skill: Analytic

AACSB: Analytic Skills

8) Refer to Table 5.1. Which of the following quarters can be associated with inflation?

A) the second quarter of the year 2006

B) the first quarter of the year 2008

C) the second quarter of the year 2008

D) all of the above

Answer: D

Answer Explanation:

The level of output produced increased (compared to the previous quarter) in all the quarters of 2006,
and then from the last quarter of 2007 to the first quarter of 2008 and from the first quarter of 2008 to
the second quarter of 2008. Thus, all of these quarters can be associated with inflation.

Diff: 2

Topic: The U.S. Economy Since 1970

Skill: Analytic

AACSB: Analytic Skills

2 True/False

1) Since 1970, the U.S. economy has experienced 2 recessions.

Answer: FALSE

Answer Explanation: Since 1970, the U.S. economy has experienced five recessions and two periods

of high inflation.

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact

2) Since 1970, the U.S. economy has experienced 2 periods of high inflation.

Answer: TRUE

Answer Explanation: Since 1970, the U.S. economy has experienced five recessions and two periods

of high inflation.

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact

3) Since 1970, the annual inflation rate in the U.S. has been about 9.7 percent or more.

Answer: FALSE

Answer Explanation: After 1983, the inflation rate has been quite low by the standards of the 1970s.
Since 1992, it has been between about 1 and 3 percent.

Diff: 1

Topic: The U.S. Economy Since 1970

Skill: Fact