ECONOMICS UNITS 5 AND 6 TEST CHAPTERS 12-16

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Which of the following economic activities does NOT illustrate the limitations of calculating GDP? a. nonmarket activities c. the underground economy b. negative externalities d. depreciation

2. According to the diagram, what is one beneficial effect of capital deepening? a. increased wages c. decreased labor productivity b. decreased wages d. decreased labor demand 3. Which one of these people lost his or her job because of structural unemployment? Jordan graduated from law school and is interviewing with various law firms. Thomass job as a landscaper is on hold until the spring. Sonya dropped out of school and now fails to meet the minimum requirements for her job. Eva lost her job at a major interior design firm during the recession in the 1980s. a. Jordan c. Sonya b. Thomas d. Eva

ECONOMICS UNITS 5 AND 6 TEST CHAPTERS 12-16

4. According to the principle of cyclical unemployment, what will occur when the demand for goods and services drops during a recession? a. The business cycle resumes an upward trend. b. The demand for labor drops. c. The demand for labor rises. d. No frictional unemployment exists. 5. Ten years ago, a house sold for $54,000. Today the same house is valued at $108,000. What has inflation done to consumers purchasing power? a. reduced it c. doubled it b. increased it d. stopped it If you lived on a fixed income, how would you be affected by inflation? a. You would be financially stressed because your income does not increase when prices go up. b. You would be hit hard because rising inflation would lower your rate of pay. c. You would benefit because you would have more purchasing power. d. There would be little effect because income is not tied to inflation.

6.

7. The poverty threshold, or poverty line, varies according to what? a. the census c. the size of the family b. nationwide income averages d. the inflation rate

ECONOMICS UNITS 5 AND 6 TEST CHAPTERS 12-16

8. What does the Lorenz Curve show about the distribution of income in 1999? a. The lowest 40 percent received 20 percent of total income. b. Two-fifths of households received 10.5 percent of income. c. The distribution of income was roughly equal. d. The distribution of income was not equal. 9. What is the Consumer Price Index? a. a measure of prices of housing and rental costs all over the country b. an index of prices of items used by manufacturers and retailers c. an index determined by measuring the price of standard goods bought by urban consumers d. an index of the cost of living for all U.S. consumers 10. Products that would be used in calculating GDP include a. toys manufactured in China at a factory owned by a U.S. company. b. cars manufactured in Tennessee at a factory owned by a Japanese automobile company. c. plastic manufactured in a factory in Kentucky and sold to toy manufacturers around the world to make plastic toys. d. cotton cloth manufactured in India and sold to clothes makers in the United States. 11. GDP expressed in constant, or unchanging, prices is called a. real GDP. c. nominal GDP. b. price level. d. net national product.

ECONOMICS UNITS 5 AND 6 TEST CHAPTERS 12-16

12. The amount of money a person has left of his or her income after taxes is called a. aggregate income. c. national income. b. personal income. d. disposable personal income. 13. The lowest point in an economic contraction is called a. a peak. c. a recession. b. a trough. d. a depression. 14. What is the difference between seasonal unemployment and structural unemployment? a. Seasonal unemployment occurs because of schedules, whereas structural occurs because people lack skills. b. Seasonal unemployment is rare in a modern society, whereas structural is not. c. Seasonal unemployment occurs only in the summer, whereas structural can occur all year round. d. Seasonal unemployment is generally among low-paid workers, whereas structural is among the highly paid. 15. When the economy is working properly, what is the unemployment rate? a. 0 to 3 percent c. 8 to 10 percent b. 4 to 6 percent d. 10 to 12 percent 16. The market basket that is used by the Bureau of Labor Statistics to calculate prices is made up of which of the following? a. food items only b. nonfood items only c. typical goods and services for an urban household d. food and necessary services for any family 17. What does it mean when a person is underemployed? a. The person has been working but now is laid off. b. The person is looking for work in a special field. c. The person is not making as much money as they need. d. The person has a job but they are overqualified for it. 18. According to the demand-pull theory, what is responsible for inflation? a. Producers raise prices to meet existing demand. b. The economy is in a wage-price spiral. c. Too much money is in circulation. d. Demand for goods and services exceed existing supply.

ECONOMICS UNITS 5 AND 6 TEST CHAPTERS 12-16

19. According to the cost-push theory, what is responsible for inflation? a. Producers raise prices to meet increased costs. b. Demand for goods and services exceed existing supply. c. Too much money is in circulation. d. The economy is operating as though there was a war. 20. An example of expansionary fiscal policy would be a. cutting taxes. c. cutting production of consumer goods. b. cutting government spending. d. cutting prices of consumer goods. 21. In contrast with classical economics, Keynesian economics a. reduces the role of government. b. takes a broader view of the economy. c. relies more heavily on the laws of supply and demand. d. more strongly emphasizes the importance of individual businesses to the overall health of the economy. 22. When revenues exceed expenditures, a. there is a budget surplus. b. there is a budget deficit. c. the government must create more money. d. the government is forced to issue more bonds to raise money. 23. An example of contractionary fiscal policy would be a. cutting taxes. b. decreasing government spending. c. increasing production of consumer goods. d. expanding the governments role in regulating private industry. 24. The purpose of expansionary fiscal policy is to a. increase output. b. prevent hyperinflation. c. slow the growth of the GDP. d. increase the separation between government and private industry. 25.Supporters of supply-side economics believe that a. government should be used as a tool to increase demand for goods. b. demand for goods increases when prices rise. c. taxes have a strong negative influence on economic output. d. tax cuts have little impact on worker productivity.

ECONOMICS UNITS 5 AND 6 TEST CHAPTERS 12-16

26. Why does the Federal Reserve alter monetary policy? a. to regulate the banking industry b. to provide services to member banks c. to enable banks to clear checks d. to lessen the effect of natural business cycles 27. How could the Federal Reserve encourage banks to lend out more of their reserves? a. reduce the discount rate c. increase the prime rate b. raise the required amount of reserve d. reduce the money supply 28. What type of policy does the Federal Reserve use to counteract an expansion that is causing high interest rates? a. fiscal policy c. easy money policy b. tight money policy d. policy lags 29. Why does a bank sometimes hold excess reserves? a. to be sure they can meet their customers demands b. to protect against high prices c. to make check clearing easier d. to keep from lending too much money 30. What type of policy does the Fed use to counteract a contraction? a. fiscal policy c. easy money policy b. tight money policy d. policy lags 31. The money multiplier formula shows the effects of a. a cash deposit into the banking system on the money supply. b. low interest rates on creditors over a long period. c. Federal Reserve discount rate reductions on the bond markets. d. the required reserve ratio on excess reserves. 32. How would an increase in the required reserve ratio affect borrowers? a. It would force banks to lower their interest rates, which would benefit many borrowers. b. It would force banks to raise their monthly charges, which would hurt many borrowers. c. It would force banks to recall a significant number of loans, which would hurt many borrowers. d. It would prompt banks to lend more money, which would benefit many borrowers.