Chapter 10 Review Questions

1) Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds. 1) _______
A) demanders; suppliers
B) suppliers; suppliers
C) suppliers; demanders
D) demanders; demanders
2) If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita?
2) _______
A) 4.7% B) 10.5%

C) 15% D) 21%

3) Liquidity refers to
3) _______
A) the number of shares of stock a corporation issues.
B) the number of times a dollar changes hands in the creation of GDP in an economy.
C) the ease with which a financial security can be traded for cash.
D) the ease with a stock can be traded for a bond.
4) During the expansion phase of the business cycle, which of the following eventually increases? 4) _______
A) employment B) income
C) production D) all of the above
5) The effect of a recession on a company like Boeing Aircraft is such that
5) _______
A) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable
goods.
B) sales decline more sharply for Boeing as compared to firms that do not produce durable goods.
C) the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D) profits fall less sharply as compared to firms that do not produce durable goods.
6) A good measure of the standard of living is 6) _______
A) real GDP per capita. B) total nominal GDP.
C) nominal GDP per capita.
D) total real GDP.
7) The response of investment spending to an increase in the government budget deficit is called 7) _______
A) private dissaving.
B) crowding out.
C) expansionary investment.
D) income minus net taxes.
8) Actual real GDP will be above potential GDP if
8) _______
A) firms are producing at capacity.
B) firms are producing below capacity.
C) inflation is rising.
D) firms are producing above capacity.
9) If labor productivity growth slows down in a country, this will
A) slow down the increase in real GDP per capita.
B) slow down the increase in nominal GDP.
C) accelerate the increase in nominal GDP.
D) accelerate the increase in real GDP per capita.

9) _______

10) The period between a business cycle peak and a business cycle trough is called
A) recession.
B) diffusion.
C) recalculation.
D) expansion.

10) ______

11) According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of
real GDP per capita is 5%?
11) ______

A) less than 1 year

B) 5 years

C) 14 years

D) 35 years

12) The period of expansion ends with a ________ and the period of recession ends with a ________.
A) business cycle peak; business cycle peak
B) business cycle peak; business cycle trough
C) business cycle trough; business cycle trough
D) business cycle trough; business cycle peak

12) ______

13) Since 1900, real GDP per capita has ________ and this measure ________ the actual growth in standards of living in the
United States over this time.
13) ______
A) increased; overstates B) decreased; overstates
C) decreased; understates
D) increased; understates
14) As the economy nears the end of a recession, which of the following do we typically see?
A) increased spending on capital goods by firms
B) further decreases in consumer spending
C) increasing interest rates
D) all of the above

14) ______

15) Technological advances generally result in 15) ______

A) increased average number of hours worked per day.
B) increased infant mortality rates.
C) increased life expectancy.
D) decreased incomes.
16) Which of the following is most liquid?
A) a dollar bill B) a government bond
C) a mutual fund share D) a corporate bond

16) ______

17) Which of the following would you expect to increase the equilibrium interest rate?
A) a change from an income tax to a consumption tax
B) an increase in the budget deficit
C) a decrease in the profitability of investment projects firms are considering
D) an increase in the percentage of income after net taxes that households save

17) ______

18) In a closed economy, which of the following equations reflects investment? (Y = GDP, C = Consumption, G =
Government purchases, T = Taxes, and TR = Transfers) 18) ______
A) Y - T + TR

B) Y - C - G

C) Y - C - T

D) C + G -T

19) Under which of the following circumstances would the government be running a deficit?
A) G = $7 trillion
T = $7 trillion
TR = $0 B) G = $5 trillion
T = $5 trillion
TR = $1 trillion C) G = $7 trillion
T = $10 trillion
TR = $3 trillion D) G = $5 trillion
T = $7 trillion
TR = $1 trillion

19) ______

20) If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the
following is true?
20) ______
A) Public saving is $100 million. B) The budget deficit is $500 million.
C) Public saving is $500 million. D) The budget deficit is $100 million.
Figure 10-2

21) Refer to Figure 10-2. Which of the following is consistent with the graph depicted above?
A) An expected expansion increases the profitability of new investment.
B) There is a shift from an income tax to a consumption tax.
C) New government regulations decrease the profitability of new investment.
D) The government runs a budget surplus.

21) ______

22) Increasing the amount of consumption spending and reducing the amount of savings ________ investment
expenditures, and ________ long-run economic growth in the economy. 22) ______
A) increases; increases B) decreases; increases
C) decreases; decreases D) increases; decreases
23) If real GDP per capita measured in 2000 dollars was $6,000 in 1950 and $48,000 in 2010, we would say that in the year
2010, the average American could buy ________ times as many goods and services as the average American in 1950.
23) ______
A) 1/8 B) 4

C) 8

D) 12

24) If real GDP in a small country in 2010 is $8 billion and real GDP in the same country in 2011 is $8.3 billion, the growth
rate of real GDP between 2010 and 2011 24) ______
A) is 3.0%.
B) is 3.6%.
C) is 3.75%.
D) cannot be determined from the information given.
25) How will an increase in the government budget surplus as a result of lower government spending (with no change in
net taxes) affect private saving in the economy? 25) ______

A) Private saving will increase by the amount of increase in the budget surplus.
B) Private saving will decrease by less than the amount of increase in the budget surplus.
C) Private saving will decrease by the amount of increase in the budget surplus.
D) Private saving will be unaffected by the increase in the budget surplus.
26) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase
of the business cycle.
26) ______
A) decrease; decrease further
C) increase; increase further

B) increase; decrease
D) decrease; increase

Scenario 10-1
Consider the following data for a closed economy:
Y = $12 trillion
C = $8 trillion
I= $2 trillion
G = $2 trillion
TR = $2 trillion
T = $3 trillion
27) Refer to Scenario 10-1. Based on the information above, what is the level of private saving in the economy?
______
A) $3 trillion

B) $4 trillion

C) $5 trillion

27)

D) $8 trillion

28) When the government runs a budget deficit, we would expect to see that
A) public saving is positive.
B) investment will fall.
C) private saving will fall.
D) G + TR < T.

28) ______

29) Which of the following increases labor productivity? 29) ______

A) decreases in the availability of computers and factory buildings
B) a decline in the health of the population
C) inventions of new machinery, equipment, or software
D) an increase in the aggregate hours of work
30) What two factors are the keys to determining labor productivity?
A) technology and the quantity of capital per hour worked
B) the business cycle and the growth rate of real GDP
C) the growth rate of real GDP and the interest rate
D) the average level of education of the workforce and the price level

30) ______

31) If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money?
31) ______
A) 1 year and 3 months B) 2 years and 6 months
C) 8 years
D) 8 years and 9 months
32) Purchases of which of the following goods would be dramatically reduced during a recession?
A) tomatoes
B) ink pens
C) refrigerators D) gasoline

32) ______

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

A) a college education B) a software program
C) a computer D) a factory building

33) ______

34) Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy?
34) ______
A) growth in capital per hour accompanied by technological change
B) a shift of workers in the economy from the agricultural sector to the nonagricultural sector
C) increases in labor force participation rates as workers who are out of the labor force pursue rising wages
D) an influx of immigrant labor into an economy without any accompanying technological change
35) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP
will decrease from
35) ______
A) 23.3 years to 20.6 years.
C) 11.2 years to 10.8 years.

B) 23.3 years to 17.5 years.

D) 28.0 years to 21.0 years.

36) Under which of the following circumstances would private saving be positive in a closed economy?
A) Y = $6 trillion
C = $2 trillion
TR = $8 trillion
G = $3 trillion
public saving = $1 trillion
B) Y = $8 trillion
C = $2 trillion
TR = $4 trillion
G = $2 trillion
public saving = $4 trillion
C) Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
public saving = $1 trillion
D) Y = $9 trillion
C = $5 trillion
TR = $1 trillion
G = $1 trillion
public saving = $3 trillion

36) ______

37) If, in an economy experiencing inflation, the government decided to tax real interest income rather than nominal
interest income, this change would cause the real interest rate to ________ and the equilibrium quantity of loanable funds
to ________.
37) ______
A) fall; rise

B) rise; rise

C) fall; fall

38) There is a government budget surplus if

A) G > TR.
B) G > T.
C) T - TR > G.

D) rise; fall
38) ______
D) TR < T.

39) The demand for durable goods

39) ______
A) declines by a greater percentage than does GDP during a recession.
B) rises by a greater percentage than does GDP during a recession.
C) declines by a smaller percentage than does GDP during a recession.

D) has decreased over time.

40) In a closed economy public saving plus private saving is equal to
A) taxes minus transfers.
B) the budget deficit.
C) investment. D) the budget surplus.

40) ______

41) In a closed economy, private saving is equal to which of the following? (Y = GDP, C = Consumption, G =
Government purchases, T = Taxes, and TR = Transfers) 41) ______
A) Y - C - T

B) Y + TR - C - T

C) Y - G - T

D) Y - G - T + TR

42) Potential GDP refers to

42) ______
A) the extent to which real GDP is above or below nominal GDP.
B) the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within
any given year.
C) the level of GDP attained when all firms are producing at capacity.
D) the level of GDP attained by the country with the highest growth in real GDP in a given year.
43) How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax?
43) ______
A) The equilibrium quantity of loanable funds would be unaffected.
B) The equilibrium quantity of loanable funds may rise or fall based on whether household saving increases or decreases
as a result of the change from an income tax to a consumption tax.
C) The equilibrium quantity of loanable funds would fall.
D) The equilibrium quantity of loanable funds would rise.
44) When the economy enters a recessionary phase of the business cycle, unemployment tends to 44) ______
A) increase.
B) be unchanged.
C) decrease.
D) change in the same direction as the rate of inflation.
45) Countries with high rates of economic growth tend to have
A) low rates of technological advancement.
B) a declining incidence of business cycle fluctuations.
C) a lower life expectancy at birth.
D) a labor force that is more productive.
Figure 10-4

45) ______

46) Refer to Figure 10-4. Which of the following is consistent with the graph depicted?
A) an increase in transfer payments to households
B) an increase in household income
C) an increase in the proportion of income after net taxes used for consumption
D) an increase in tax revenues collected by the government

46) ______

47) If consumers decide to be more frugal and save more out of their income, then this will cause 47) ______
A) a movement to the right along the supply curve for loanable funds.
B) a movement to the left along the supply curve for loanable funds.
C) a shift in the supply curve for loanable funds to the right.
D) a shift in the supply curve for loanable funds to the left.
48) In a closed economy, which of the following components of GDP is not included?
A) consumptionB) net exports
C) investment D) government spending

48) ______

49) Which of the following explains the cause of the change in the unemployment rate at the end of a recession?
______

49)

A) Firms rapidly hire new workers at the first sign of on an increase in demand for their goods.
B) Firms are hesitant to rehire laid off workers as they continue to operate below capacity.
C) Discouraged workers return to the labor force and this makes the unemployment rate fall.
D) Discouraged workers leave the labor force and this makes the unemployment rate rise.
50) During a recession, spending on ________ tends to fall more dramatically than spending on ________. 50) ______
A) food; cars
B) necessities; luxuries
C) durable goods; nondurable goods
D) nondurable goods; durable goods

1) A
2) A
3) C
4)
5) B
6) A
7) B
8) D
9) A
10) A
11)
12) B
13) D
14) A
15) C
16) A
17) B
18) B
19) B
20) A
21)
22) C
23) C
24) C
25) B
26) B
27) A
28) B
29) C
30) A
31) D
32) C
33) A
34) A
35) B
36) C
37) A
38)
39) A
40) C
41) B
42) C
43) D
44) A
45) D
46) C
47)
48) B
49) B
50) C