Unit 7

Introduction to Macroeconomics

1. Gross Domestic Product (GDP) is best defined as:

A. The total income earned by a nation's permanent residents. (
B. The total value of all goods and services produced by a nation's residents, regardless of location.
C. The total value of all final goods and services produced within a country's borders in a specific time
period.
D. The sum of all wages, rents, interest, and profits in an economy.Answer: (c) The total value of all
final goods and services produced within a country's borders in a specific time period.
2. Inflation refers to a sustained:
A. Decrease in the general price level of goods and services.
B. Increase in the purchasing power of money.
C. Increase in the general price level of goods and services in an economy.
D. Fluctuation in the exchange rate. Answer: (c) Increase in the general price level of goods and
services in an economy.
3. The unemployment rate is calculated as the percentage of:
A. The total population that is not working.
B. The adult population that is not working and not looking for work.
C. The labor force that is not working and is actively looking for work.
D. The adult population that is not working.Answer: (c) The labor force that is not working and is
actively looking for work.
4. The Consumer Price Index (CPI) is a measure of the average change over time in the prices:
A. Received by domestic producers for their output.
B. Paid by urban consumers for a basket of consumer goods and services.
C. Of all goods and services produced in an economy.
D. Of stocks and bonds.Answer: (b) Paid by urban consumers for a basket of consumer goods and
services.
5. The balance of payments (BOP) is a record of a country's:
A. Government's budget deficits and surpluses.
B. International trade in goods only.
C. All economic transactions between its residents and the rest of the world over a period of time.
D. Stock market performance.Answer: (c) All economic transactions between its residents and the
rest of the world over a period of time.
6. Economic growth is typically measured by the percentage change in:
A. The inflation rate.
B. The unemployment rate.
C. Real Gross Domestic Product (Real GDP)
D. The balance of trade. Answer: (c) Real Gross Domestic Product (Real GDP).
7. Which of the following is considered a central concern of macroeconomics?
A. The decision-making of individual consumers.
B. The pricing strategies of individual firms.
C. The overall performance of the national economy.
D. The supply and demand for a specific product.Answer: (c) The overall performance of the
national economy.
8. A key macroeconomic issue related to the labor market is:
A. The optimal production level for a single factory.
B. The equilibrium price in a perfectly competitive market.
C. The level and causes of unemployment in the economy.
D. The investment decisions of a small business.Answer: (c) The level and causes of
unemployment in the economy.
9. Sustained increases in the general price level are a macroeconomic issue known as:
A. Deflation. (b) Recession. (c) Inflation. (d) Stagnation. Answer: (c) Inflation.
10. The issue of long-run economic growth is concerned with:
A. Short-term fluctuations in business cycles. (
B. The factors that lead to a sustained increase in a nation's output and living standards over time.
C. Government policies aimed at reducing income inequality in the short run.
D. Seasonal variations in economic activity.Answer: (b) The factors that lead to a sustained
increase in a nation's output and living standards over time.
11. Macroeconomic policy often aims to address:
A. The marketing strategies of individual firms.
B. The optimal inventory levels for a single retailer.
C. Issues such as unemployment, inflation, and economic growth.
D. The financial decisions of individual households.Answer: (c) Issues such as unemployment,
inflation, and economic growth.
12. Fluctuations in economic activity, characterized by periods of expansion and contraction, are known
as:
A. Secular trends. (b) Seasonal adjustments. (c) Business cycles. (d) Structural changes.Answer: (c)
Business cycles.
13. Government intervention in the economy to stabilize output and employment levels is a key aspect of:
A. Microeconomic management.
B. Macroeconomic policy.
C. Industrial organization.
D. International trade theory.Answer: (b) Macroeconomic policy.
14. The issue of international trade and its impact on a national economy is a significant area of:
A. Behavioral economics. (b) Environmental economics. (c) Macroeconomics. (d) Labor
economics.Answer: (c) Macroeconomics.
15. Understanding the determinants of a nation's overall standard of living is a central theme in the study
of:
A. Public finance. (b) Macroeconomics. (c) Microeconomics. (d) Economic history.Answer: (b)
Macroeconomics.
16. Which of the following is a primary goal of macroeconomic policy in most countries?
A. Maximizing the profits of individual firms.
B. Achieving a perfectly equal distribution of income.
C. Maintaining low unemployment, stable prices, and sustainable economic growth.
D. Eliminating all government debt.Answer: (c) Maintaining low unemployment, stable prices, and
sustainable economic growth.:
17. Which of the following is generally considered a primary macroeconomic goal?
A. Maximizing individual firm profits.
B. Achieving a perfectly balanced government budget every year.
C. Maintaining a high level of employment.
D. Minimizing income inequality at all costs.Answer: (c) Maintaining a high level of employment.
18. The macroeconomic goal of "stable prices" primarily aims to avoid:
A. High levels of government debt.
B. Significant fluctuations in the general price level, such as high inflation or deflation.
C. Large trade deficits.
D. Rapid technological change.Answer: (b) Significant fluctuations in the general price level, such
as high inflation or deflation.
19. Sustainable economic growth, as a macroeconomic goal, refers to:
A. Short-term increases in production due to seasonal factors.
B. A rate of economic expansion that can be maintained over the long run without depleting
resources or causing significant environmental damage.
C. Growth that only benefits a small segment of the population.
 D. Economic growth achieved through excessive borrowing from other countries.Answer: (b) A
rate of economic expansion that can be maintained over the long run without depleting resources
or causing significant environmental damage.
20. A low rate of unemployment is desirable as a macroeconomic goal because it leads to:
A. Higher government tax revenues and reduced social welfare spending.
B. Increased output, higher incomes, and improved living standards.
C. Lower wage growth and reduced labor costs for businesses.
D. Decreased competition among firms.Answer: (b) Increased output, higher incomes, and
improved living standards.
21. Price stability is important for:
A. Encouraging speculation in financial markets.
B. Reducing uncertainty for consumers and businesses, facilitating long-term planning and
investment.
C. Increasing the volatility of exchange rates.
D. Making it easier for governments to finance large deficits through inflation.Answer: (b)
Reducing uncertainty for consumers and businesses, facilitating long-term planning and
investment.
22. Which of the following is often considered a trade-off when pursuing macroeconomic goals?
A. Higher employment and lower inflation.
B. Lower interest rates and increased investment.
C. Increased government spending and a balanced budget.
D. Higher economic growth and lower unemployment.Answer: (a) Higher employment and lower
inflation (the Phillips Curve suggests a short-run trade-off).
23. The goal of equitable distribution of income aims to:
A. Ensure that everyone in the economy earns the exact same income.
B. Reduce the disparities in income and wealth across the population.
C. Maximize the profits of the wealthiest individuals and corporations.
D. Eliminate all forms of taxation.Answer: (b) Reduce the disparities in income and wealth across
the population.
24. Maintaining a stable exchange rate is a macroeconomic goal that is particularly important for:
A. Economies with very little international trade.
B. Economies with significant international trade and investment flows
C. Economies that are completely self-sufficient.
D. Economies with fixed exchange rate systems only.Answer: (b) Economies with significant
international trade and investment flows.
25. The concept of "full employment" in macroeconomics generally refers to:
A. A situation where everyone who wants a job has one. (
B. A situation where the unemployment rate is zero.
C. A level of unemployment that is consistent with the economy's natural rate of unemployment
(including frictional and structural unemployment).
D. A situation where the number of job vacancies equals the number of unemployed individuals.
Answer: (c) A level of unemployment that is consistent with the economy's natural rate of
unemployment (including frictional and structural unemployment).
26. Achieving macroeconomic goals often requires:
A. Relying solely on the automatic adjustments of the free market.
B. The implementation of effective and coordinated monetary and fiscal policies.
C. Ignoring the potential impact of international economic events.
D. Focusing on only one goal at a time.Answer: (b) The implementation of effective and
coordinated monetary and fiscal policies.
27. High and persistent unemployment is a significant macroeconomic problem because it leads to:
A. Increased productivity and higher wages for those employed.
B. A fuller utilization of the economy's resources and potential output.
 C. Lost output, reduced incomes, and social costs like increased crime and poverty.
D. Lower inflation and increased purchasing power for consumers.Answer: (c) Lost output,
reduced incomes, and social costs like increased crime and poverty.
28. Rapid and uncontrolled inflation is a macroeconomic problem that can result in:
A. Increased savings and investment due to higher nominal returns.
B. Greater certainty for businesses and consumers in their economic planning.
C. A decrease in the real value of money, reduced purchasing power, and economic instability.
D. An increase in the competitiveness of a country's exports.Answer: (c) A decrease in the real
value of money, reduced purchasing power, and economic instability.
29. A prolonged period of economic contraction and falling output is known as:
A. An expansion. (b) A boom. (c) A recession or depression. (d) Stagflation.Answer: (c) A
recession or depression.
30. A situation where an economy experiences both high inflation and high unemployment simultaneously
is called:

(a) Deflation. (b) Hyperinflation. (c) Stagflation. (d) Disinflation.Answer: (c) Stagflation.

31. Large and persistent government budget deficits can lead to:
A. Increased national saving and lower interest rates.
B. Reduced government debt and greater fiscal flexibility.
C. Higher national debt, increased interest payments, and potential crowding out of private
investment.
D. Decreased demand for government bonds.Answer: (c) Higher national debt, increased interest
payments, and potential crowding out of private investment.
32. A large and persistent trade deficit (where imports exceed exports) can be a macroeconomic problem
because it may indicate:
A. Strong international competitiveness of domestic industries.
B. An outflow of domestic currency and potential downward pressure on the exchange rate.
C. Increased domestic production to meet foreign demand.
D. Higher levels of domestic saving.Answer: (b) An outflow of domestic currency and potential
downward pressure on the exchange rate.
33. Significant income inequality can be considered a macroeconomic problem because it may lead to:
A. Increased overall economic efficiency and higher rates of economic growth.
B. Greater social unrest, reduced social cohesion, and potential barriers to long-term economic
development.
C. A more stable and predictable pattern of consumer spending.
D. A more efficient allocation of resources based on individual merit.Answer: (b) Greater social
unrest, reduced social cohesion, and potential barriers to long-term economic development.
34. Unsustainable economic growth, characterized by the depletion of natural resources or environmental
degradation, poses a long-term macroeconomic problem for:
A. Only developing countries.
B. Only countries with large manufacturing sectors
C. The long-term well-being and sustainability of all economies.
D. Only countries with high population growth rates.Answer: (c) The long-term well-being and
sustainability of all economies.
35. Financial instability, such as asset bubbles and banking crises, can create significant macroeconomic
problems by:
A. Encouraging excessive risk-taking and innovation.
B. Disrupting credit markets, reducing investment, and leading to economic downturns.
C. Increasing the efficiency of financial intermediation.
D. Lowering interest rates and making borrowing cheaper for everyoneAnswer: (b) Disrupting
credit markets, reducing investment, and leading to economic downturns.
36. A lack of productivity growth is a fundamental macroeconomic problem because it limits:
A. The ability of firms to lower prices.
B. The potential for sustained increases in real wages and living standards.
C. The need for technological innovation
D. The importance of international trade.Answer: (b) The potential for sustained increases in real
wages and living standards.
37. Inflation is best defined as a sustained:
A. Decrease in the general level of prices for goods and services.
B. Increase in the purchasing power of money. (
C. Increase in the general level of prices for goods and services in an economy. (d) Fluctuation in
the exchange rate.Answer: (c) Increase in the general level of prices for goods and services in an
economy.
38. The most commonly used measure of inflation in many countries is the:
A. Producer Price Index (PPI).
B. Wholesale Price Index (WPI). (c)
C. Consumer Price Index (CPI).
D. GDP deflator.Answer: (c) Consumer Price Index (CPI).
39. Demand-pull inflation is primarily caused by:
A. A decrease in the cost of production for firms
B. An increase in aggregate demand that outpaces aggregate supply.
C. A decrease in the money supply.
D. ) An increase in the savings rate of households.Answer: (b) An increase in aggregate demand
that outpaces aggregate supply.
40. Cost-push inflation is primarily caused by:
A. An increase in government spending.
B. A decrease in consumer confidence.
C. An increase in the costs of production for firms, such as wages or raw materials.
D. decrease in the overall demand for goods and services.Answer: (c) An increase in the costs of
production for firms, such as wages or raw materials.
41. Hyperinflation refers to:
A. A mild and predictable increase in the price level.
B. A very high and rapidly accelerating rate of inflation.
C. A decrease in the rate of inflation.
D. A situation where the price level remains constant.Answer: (b) A very high and rapidly
accelerating rate of inflation.
42. The quantity theory of money suggests that in the long run, inflation is primarily caused by:
A. Increases in government spending
B. Increases in the money supply relative to the growth of real output. (
C. Decreases in the velocity of money.
D. Increases in the demand for money.Answer: (b) Increases in the money supply relative to the
growth of real output.
43. One of the negative consequences of high inflation is that it:
A. Increases the real value of savings.
B. Makes it easier for businesses to plan for the future.
C. Reduces the purchasing power of money.
D. Encourages lending and borrowing.Answer: (c) Reduces the purchasing power of money.
44. Deflation, the opposite of inflation, is a sustained:
A. Increase in the general level of prices.
B. Decrease in the general level of prices.
C. Period of economic stagnation.
D. Increase in the unemployment rate.Answer: (b) Decrease in the general level of prices.
45. Central banks often aim for a low and stable rate of inflation because it:
 A. Maximizes government revenue from seigniorage.
B. Creates more uncertainty for businesses and consumers. (
C. Provides a buffer against deflation and helps the economy function smoothly.
D. Always leads to higher rates of economic growth.Answer: (c) Provides a buffer against deflation
and helps the economy function smoothly.
46. Unemployment refers to the situation where people in the labor force are:
A. Not working and not looking for work
B. Working part-time but wanting full-time work.
C. Not working but are actively looking for a job.
D. Underpaid for their skills and experience.Answer: (c) Not working but are actively looking for a
job.
47. The unemployment rate is calculated as the percentage of:
A. The total population that is unemployed. (
B. The adult population that is unemployed.
C. The labor force that is unemployed.
D. working-age population that is unemployed.Answer: (c) The labor force that is unemployed.
48. Frictional unemployment occurs when:
A. There is a mismatch between the skills of the unemployed and the skills required by available
jobs.
B. The economy experiences a downturn or recession, leading to widespread job losses.
C. Workers are temporarily between jobs, searching for new ones.
D. Changes in the structure of the economy lead to the obsolescence of certain jobs.Answer: (c)
Workers are temporarily between jobs, searching for new ones.
49. Structural unemployment arises from:
A. Short-term fluctuations in the business cycle
B. Workers voluntarily leaving their jobs to seek better opportunities.
C. A fundamental mismatch between the skills or location of the unemployed and the requirements
or location of available jobs.
D. Seasonal variations in employment.Answer: (c) A fundamental mismatch between the skills or
location of the unemployed and the requirements or location of available jobs.
50. Cyclical unemployment is associated with:
A. Long-term changes in the economy's structure.
B. The natural turnover of workers in the labor market.
C. ) Fluctuations in the business cycle, increasing during recessions and decreasing during
expansions.
D. Industries that experience predictable seasonal layoffs.Answer: (c) Fluctuations in the business
cycle, increasing during recessions and decreasing during expansions.
51. The natural rate of unemployment is the sum of:
A. Frictional and cyclical unemployment.
B. Structural and cyclical unemployment.
C. Frictional and structural unemployment.
D. All three types of unemployment (frictional, structural, and cyclical).Answer: (c) Frictional and
structural unemployment.
52. Discouraged workers are individuals who:
A. Are currently employed but are looking for a different job.
B. Are not working, have looked for a job in the past, but are not currently looking because they
believe no suitable jobs are available
C. Are working part-time because they cannot find full-time employment.
D. Have retired from the labor force.Answer: (b) Are not working, have looked for a job in the past,
but are not currently looking because they believe no suitable jobs are available.
53. Full employment in an economy is generally considered to occur when:
A. The unemployment rate is zero.
 B. There is only cyclical unemployment.
C. The unemployment rate is equal to the natural rate of unemployment
D. Everyone in the working-age population has a job.Answer: (c) The unemployment rate is equal
to the natural rate of unemployment.
54. Policies aimed at reducing structural unemployment often focus on:
A. Increasing aggregate demand during a recession.
B. Providing job training and education to improve workers' skills. (
C. Lowering interest rates to stimulate investment. (
D. Providing unemployment benefits to support those who have lost their jobs.Answer: (b)
Providing job training and education to improve workers' skills.
55. The labor force participation rate is the percentage of the:
A. Total population that is either employed or unemployed
B. Adult population that is either employed or unemployed.
C. Working-age population that is either employed or unemployed. (
D. Employed population that is actively looking for a better job.Answer: (c) Working-age
population that is either employed or unemployed.
56. Atrade balance deficit occurs when a country's:
A. Exports of goods and services exceed its imports of goods and services.
B. Imports of goods and services exceed its exports of goods and services.
C. Total value of trade (exports + imports) is decreasing.
D. Financial inflows exceed its financial outflows.Answer: (b) Imports of goods and services
exceed its exports of goods and services.
57. A trade balance deficit is also sometimes referred to as a:
A. Trade surplus. (b) Current account surplus. (c) Current account deficit. (d) Balanced
trade.Answer: (c) Current account deficit (The trade balance is a significant component of the
current account).
58. Which of the following could contribute to a trade balance deficit?
A. Increased demand for a country's exports by foreign consumers.
B. A recession in the domestic economy, leading to decreased import demand.
C. A strong domestic currency making imports cheaper and exports more expensive.
D. Higher productivity in domestic industries, making exports more competitive.Answer: (c) A
strong domestic currency making imports cheaper and exports more expensive.
59. A persistent trade balance deficit might indicate that a country is:
A. Saving more than it is investing domestically
B. Producing more goods and services than its residents are purchasing
C. Consuming more goods and services than it is producing domestically.
D. Experiencing rapid economic growth driven by exports.Answer: (c) Consuming more goods and
services than it is producing domestically.
60. One potential long-term concern associated with a large and persistent trade balance deficit is:
A. An appreciation of the domestic currency
B. An accumulation of foreign debt
C. Increased domestic employment in export-oriented industries.
D. A decrease in the price of imported goods.Answer: (b) An accumulation of foreign debt.
61. Policies that a government might implement to try and reduce a trade balance deficit include:
A. Lowering tariffs on imported goods.
B. Increasing government spending significantly.
C. Devaluing the domestic currency to make exports cheaper and imports more expensive
D. Raising interest rates to encourage more domestic borrowing.Answer: (c) Devaluing the
domestic currency to make exports cheaper and imports more expensive.
62. A trade balance deficit means that:
A. The value of goods leaving the country is greater than the value of goods entering.
 B. The value of financial assets leaving the country is greater than the value of financial assets
entering.
C. The value of goods and services entering the country is greater than the value of goods and
services leaving
D. The country's overall international financial position is improving.

Answer: (c) The value of goods and services entering the country is greater than the value of goods and
services leaving.

63. A trade balance deficit can be financed by:

A. Increased domestic savings.
B. Borrowing from abroad or selling domestic assets to foreigners.
C. Decreased government spending.
D. Higher export revenues.Answer: (b) Borrowing from abroad or selling domestic assets to
foreigners.
64. In the short run, a trade balance deficit might lead to:
A. Increased domestic production and employment in import-competing industries.
B. Lower prices for consumers due to cheaper imports.
C. An increase in the demand for domestically produced goods
D. An appreciation of the domestic currency.Answer: (b) Lower prices for consumers due to
cheaper imports.
65. Whether a trade balance deficit is a "problem" depends on various factors, including:
A. The size and persistence of the deficit, the reasons behind it, and how it is financed
B. Whether the country has a fixed or floating exchange rate. (
C. ) The level of government spending.
D. The rate of domestic inflation.Answer: (a) The size and persistence of the deficit, the reasons
behind it, and how it is financed.