1. Which of the following statements
every
about GDP is correct? a. GDP
measures two things at once: the
total income of everyone in the
economy and the unemployment
rate. b. Money continuously flows
from households to government
and then back to households, and
GDP measures this flow of money.
c. GDP is to a nations economy as
household income is to a
household. d. All of the above are
correct.
2. Which of the following statements about
GDP is correct? a. GDP measures two
things at once: the total income of
everyone in the economy and the total
expenditure on the economys output of
goods and services. b. Money
continuously flows from households to
firms and then back to households, and
GDP measures this flow of money. c.
GDP is generally regarded as the best
single measure of a societys economic
well-being. d. All of the above are
correct.
3. Gross domestic product serves as a
measure of two things: a. the total
spending of everyone in the economy
and the total saving of everyone in the
economy. b. the total income of
everyone in the economy and the total
expenditure on the nation's output of
goods and services. c. the value of the
nation's output of goods and services for
domestic citizens and the value of the
nation's output of goods and services for
the rest of the world. d. the nation's
saving and the nation's investment.
4. If a nations GDP rises, then it must be
the case that the nations a. income and
expenditure both rise. b. income and
saving both rise. c. income rises, but
expenditure may rise or fall. d. saving
rises, but income may rise or fall.
5. Because every transaction has a buyer
and a seller, a. GDP is more closely
associated with a nations income than it
is with a nations expenditure. b.
transaction contributes equally to an
economys income and to its
expenditure. c. the number of firms must
be equal to the number of households in
a simple circular-flow diagram. d. firms
profits are necessarily zero in a simple
circular-flow diagram.
6. In a simple circular-flow diagram total
income and total expenditure are a.
never equal because total income always
exceeds total expenditure. b. seldom
equal because of the ongoing changes in
an economys unemployment rate. c.
equal only when one dollar is spent on
goods for every dollar that is spent on
services. d. always equal because every
transaction has a buyer and a seller.
7. Firms use the money they get from a
sale to a. pay wages to workers. b. pay
rent to landlords. c. pay profit to the
firms owners. d. All of the above are
correct.
8. For an economy as a whole, a.wages
must equal profit. b.consumption must
equal income. c.income must equal
expenditure. d.consumption must equal
saving.
9. For an economy as a whole, a. the
market value of production must equal
expenditure. b. investment must equal
the value of stocks and bonds purchased.
c. wages must equal income. d.
consumption must equal saving.
10. For the economy as a whole, a. income
must be greater than expenditure.
b.unemployment must rise when GDP
rises. c.expenditure must equal income.
d.consumption must be greater than
investment.
11. Which of the following statements about
GDP is correct? a. GDP measures two
things at once: the total income of
everyone in the economy and the total
expenditure on the economy s output of
goods and services. b.Money
continuously flows from households to
 firms and then back to households, and saving both rise. c.income rises and
GDP measures this flow of money. c. expenditure falls. d.income and
GDP is generally regarded as the best expenditure both rise.
single measure of a society s economic 17. Total cost is the
well-being. d. All of the above are a. amount a firm receives for the sale of
correct. its output.
12. In the GDP accounts production equals b. fixed cost less variable cost.
a.income. b.income + saving. c.income - c. market value of the inputs a firm uses
in production.
government expenditures. d.income -
d. quantity of output minus the quantity
imports. ANSWER: a 38. Because every
of inputs used to make a good.
transaction has a buyer and a seller, 18. Those things that must be forgone to
a.GDP is more closely associated with acquire a good are called
an economy s income than it is with an a. implicit costs.
economy s expenditure. b.every b. opportunity costs.
transaction contributes equally to an c. explicit costs.
economy s income and to its d. accounting costs.
expenditure. c.the number of firms must 19. Explicit costs
be equal to the number of households in a. require an outlay of money by the
a simple circular-flow diagram. d.firms firm. b. include all of the firm's
profits are necessarily zero in a simple opportunity costs. c. include income that
circular-flo w diagram. is forgone by the firm's owners. d. Both
13. For an economy as a whole, income b and c are correct.
must equal expenditure because a. the 20. Implicit costs
a. do not require an outlay of money by
number of firms is equal to the number
the firm.
of households in an economy. b.
b. do not enter into the economist's
individuals can only spend what they measurement of a firm's profit.
earn each period. c.every dollar of c. are also known as variable costs.
spending by some buyer is a dollar of d. are not part of an economist's
income for some seller. d. every dollar measurement of opportunity cost.
of saving by some consumer is a dollar 21. Accounting profit is equal to
of spending by some other consumer. a. marginal revenue minus marginal
14. If an economy s GDP falls, then it must cost. b. total revenue minus the explicit
be the case that the economys a.income cost of producing goods and services.
falls and saving rises. b.income and c. total revenue minus the opportunity
saving both fall. c.income falls and cost of producing goods and services.
expenditure rises. d.income and d. average revenue minus the average
expenditure both fall. cost of producing the last unit of a good
15. If an economy s GDP falls, then it must or service.
be the case that the economys a.income 22. When calculating a firm's profit, an
and saving fall. b.income and market economist will subtract only
a. explicit costs from total revenue since
value of all production both fall.
these are the only costs that can be
c.income falls and market value of all
measured explicitly.
production rises. d.income rises and b. implicit costs from total revenue since
market value of all production falls. these include both the costs that can be
16. If an economy s GDP rises, then it must directly
be the case that the economys a.income measured as well as the costs that can be
rises and saving falls. b.income and indirectly measured.
 c. the opportunity costs from total b. the market price to fall.
revenue since these include both the c. its profits to fall.
implicit and explicit d. All of the above are correct.
costs of the firm. 28. In the short-run, a firm's supply curve is
d. the marginal cost since the cost of the equal to the
next unit is the only relevant cost. a. marginal cost curve above its average
23. A production function describes variable cost curve.
a. how a firm maximizes profits. b. marginal cost curve above its average
b. how a firm turns inputs into output. total cost curve.
c. the minimal cost of producing a given c. average variable cost curve above its
level of output. marginal cost curve.
d. the relationship between cost and d. average total cost curve above its
output. marginal cost curve.
24. The marginal product of labor is equal 29. Macroeconomists study
to the a. the decisions of households and firms.
a. incremental cost associated with a one b. the interaction between households
unit increase in labor. and firms.
b. incremental profit associated with a c. economy-wide phenomena.
one unit increase in labor. d. regulations on firms and unions.
c. increase in labor necessary to generate 30. We would expect a macroeconomist, as
a one unit increase in output. opposed to a microeconomist, to be
d. increase in output obtained from a particularly interested in
one unit increase in labor. a. explaining how economic changes
25. When comparing short-run average total affect prices of particular goods.
cost with long-run average total cost at a b. devising policies to deal with market
given level of output, failures such as externalities and market
a. short-run average total cost is power. c. devising policies to promote
typically above long-run average total low inflation.
cost. d. identifying those markets that are
b. short-run average total cost is competitive and those that are not
typically the same as long-run average competitive.
total cost. 31. The basic tools of supply and demand
c. short-run average total cost is are
typically below long-run average total a. useful only in the analysis of
cost. economic behavior in individual
d. the relationship between short-run markets.
and long-run average total cost follows b. useful in analyzing the overall
no clear pattern. economy, but not in analyzing
26. A firm has market power if it can individual markets.
a. maximize profits. c. central to microeconomic analysis,
b. minimize costs. but seldom used in macroeconomic
c. influence the market price of the good analysis.
it sells. d. central to macroeconomic analysis as
d. hire as many workers as it needs at well as to microeconomic analysis.
the prevailing wage rate. 32. Which of the following statistic is
27. Suppose a firm operates in the short run usually regarded as the best single
at a price above its average total cost of measure of a society's
production. In the economic well-being?
long run the firm should expect a. the unemployment rate
a. new firms to enter the market. b. the inflation rate
 c. gross domestic product government.
d. the trade deficit c. households and the government, but
33. Which of the following statements about not firms.
GDP is correct? d. households, firms, and the
a. GDP measures two things at once: the government.
total income of everyone in the 37. GDP is defined as
economy and the a. the market value of all goods and
unemployment rate of the economy's services produced within a country in a
labor force. given period of
b. Money continuously flows from time.
households to government and then back b. the market value of all goods and
to households, services produced by the citizens of a
and GDP measures this flow of money. country,
c. GDP is to a nation's economy as regardless of where they are living, in a
household income is to a household. given period of time.
d. All of the above are correct. c. the market value of all final goods and
34. Gross domestic product measures two services produced within a country in a
things at once: given
a. the total spending of everyone in the period of time.
economy and the total saving of d. the market value of all final goods
everyone in the and services produced by the citizens of
economy. a country,
b. the total income of everyone in the regardless of where they are living, in a
economy and the total expenditure on given period of time.
the economy's 38. In order to include many different goods
output of goods and services. and services in an aggregate measure,
c. the value of the economy's output of GDP is computed
goods and services for domestic citizens using, primarily,
and the a. values of goods and services based on
value of the economy's output of goods surveys of consumers.
and services for the rest of the world. b. market prices.
d. the total income of households in the c. consumer and producer surpluses.
economy and the total profit of firms in d. costs of producing goods and
the economy. services.
35. In a simple circular-flow diagram, total 39. Which of the following items is
income and total expenditure are included in U.S. GDP?
a. never equal because total income a. goods produced by foreign citizens
always exceeds total expenditure. working in the United States
b. seldom equal because of the ongoing b. the difference in the price of the sale
changes in an economy's unemployment of an existing home and its original
rate. c. equal only when one dollar is purchase price
spent on goods for every dollar that is c. known illegal activities
spent on services. d. None of the above is included in U.S.
d. always equal because every GDP.
transaction has a buyer and a seller. 40. Which of the following items is
36. In the actual economy, goods and included in U.S. GDP?
services are purchased by a. final goods and services that are
a. households, but not firms or the purchased by the U.S. federal
government. government
b. households and firms, but not the b. intermediate goods that are produced
 in the U.S. but that are unsold at the end 45. A relatively mild period of falling
of the GDP incomes and rising unemployment is
accounting period called a
c. goods and services produced by a. depression.
foreign citizens working in the U.S. b. recession.
d. All of the above are included in U.S. c. expansion.
GDP. d. business cycle.
41. Which of the following statements about 46. During recessions
GDP is correct? a. workers are laid off.
a. Nominal GDP values production at b. factories are idle.
current prices, whereas real GDP values c. firms may find they are unable to sell
production at all they produce.
constant prices. d. All of the above are correct.
b. Nominal GDP values production at 47. During recessions which type of
constant prices, whereas real GDP spending falls?
values production a. consumption and investment
at current prices. b. investment but not consumption
c. Nominal GDP values production at c. consumption but not investment
market prices, whereas real GDP values d. neither consumption nor investment
production at 48. The model of short-run economic
the cost of the resources used in the fluctuations focuses on the price level
production process. and
d. Nominal GDP consistently a. real GDP.
underestimates the value of production, b. economic growth.
whereas real GDP c. the neutrality of money.
consistently overestimates the value of d. None of the above is correct.
production. 49. The model of aggregate demand and
42. Most economists use the aggregate aggregate supply explains the
demand and aggregate supply model relationship between
primarily to analyze a. the price and quantity of a particular
a. short-run fluctuations in the economy. good.
b. the effects of macroeconomic policy b. unemployment and output.
on the prices of individual goods. c. wages and employment.
c. the long-run effects of international d. real GDP and the price level.
trade policies. 50. Which of the following is included in
d. productivity and economic growth. the aggregate demand for goods and
43. Which of the following explains why services?
production rises in most years? a. consumption demand
a. increases in the labor force b. investment demand
b. increases in the capital stock c. net exports
c. advances in technological knowledge d. All of the above are correct.
d. All of the above are correct. 51. Which of the following effects helps to
44. Which of the following is most explain the downward slope of the
commonly used to monitor short-run aggregate-demand curve?
changes in economic activity? a. the exchange-rate effect
a. the inflation rate b. the wealth effect
b. real GDP c. the interest-rate effect
c. aggregate demand d. All of the above are correct.
d. aggregate supply 52. The aggregate supply curve is upward
sloping in
 a. the short and long run. 58. Ceteris paribus, if there are diminishing
b. neither the short nor long run. returns, which of the following is true if
c. the long run, but not the short run. a country increases its capital by one
d. the short run, but not the long run. unit? a. Output will rise by more than it
53. Which of the following shifts short-run did when the previous unit was added.
aggregate supply right? b. Output will rise but by less than it did
a. an increase in the price level when the previous unit was added.
b. an increase in the minimum wage c. Output will fall by more than it did
c. a decrease in the price of oil when the previous unit was added.
d. more people migrate abroad than d. Output will fall but by less then it did
immigrate from abroad when the previous unit was added.
54. Which of the following would cause 59. Changes in nominal GDP reflect
prices to fall and output to rise in the a. only changes in prices.
short run? b. only changes in the amounts being
a. Short-run aggregate supply shifts produced.
right. c. both changes in prices and changes in
b. Short-run aggregate supply shifts left. the amounts being produced.
c. Aggregate demand shifts right. d. neither changes in prices nor changes
d. Aggregate demand shifts left. in the amounts being produced.
55. As an alternative to selling shares of 60. Chris and Tony both produce tomatoes
stock as a means of raising funds, a and pasta sauce. The table shows their
large company could, instead, possible production per month if both
a. invest in physical capital. work the same number of 8 hour days.
b. use equity finance. Chris's opportunity cost of 1 lb. of
c. sell bonds. tomatoes is
d. purchase bonds. a. 2 jars of sauce and Tony's opportunity
56. Assume the bonds below have the same cost of 1 lb. of tomatoes is 3 jars of
term and principal and that the state or sauce.
local government that issues the b. 3 jars of sauce and Tony's opportunity
municipal bond has a good credit rating. cost of 1 lb. of tomatoes is 2 jars of
Which list has bonds correctly ordered sauce.
from the one that pays the highest c. 20 jars of sauce and Tony's
interest rate to the one that pays the opportunity cost of 1 lb. of tomatoes is
lowest interest rate? 30 jars of sauce.
a. corporate bond, municipal bond, U.S. d. 30 jars of sauce and Tony's
government bond opportunity cost of 1 lb. of tomatoes is
b. corporate bond, U.S. government 20 jars of sauce.
bond, municipal bond 61. Chris and Tony both produce tomatoes
c. municipal bond, U.S. government and pasta sauce. The table shows their
bond, corporate bond possible production per month if both
d. U.S. government bond, municipal work the same number of 8 hour days. If
bond, corporate bond Chris and Tony both decide to specialize
57. The bond market, the stock market, and produce only the good in which they
banks, pension funds, and insurance have a comparative advantage, then
companies are all financial a. Chris will produce only sauce and
a. systems. Tony will produce only tomatoes.
b. markets. b. Chris will produce only tomatoes and
c. institutions. Tony will produce only sauce.
d. intermediaries. c. Both Chris and Tony will produce
only sauce.
 d. Both Chris and Tony will produce
only tomatoes.
62. Chris and Tony both produce tomatoes
and pasta sauce. The table shows their
possible production per month if both
work the same number of 8 hour days.
Which of the following prices would
result in a mutually advantageous trade
between Chris and Tony?
a. 1 lb. of tomatoes for 23 jars of sauce
b. 1 lb. of tomatoes for 27 jars of sauce
c. 1 lb. of tomatoes for 33 jars of sauce
d. Both a and b are correct.
63. Chris and Tony both produce tomatoes
and pasta sauce. The table shows their
possible production per month if both
work the same number of 8 hour days.
Which of the following statements is
correct?
a. Tony has a comparative advantage in
the production of sauce.
b. Chris has a comparative advantage in
the production of tomatoes.
c. Tony has an absolute advantage in the
production of tomatoes.
d. Chris has an absolute advantage in the
production of tomatoes.
64. Consider three imaginary countries. In
Mainland, saving amounts to $4,000 and
consumption amounts to $8,000; in
Upland, saving amounts to $2,000 and
consumption amounts to $15,000; and in
Lowland, saving amounts to $6,000 and
consumption amounts to $11,000. The
saving rate is
a. higher in Mainland than in Lowland,
and it is higher in Lowland than in
Upland. b. higher in Lowland than in
Mainland, and it is higher in Mainland
than in Upland.
c. higher in Lowland than in Upland,
and it is the same in Upland and
Mainland.
d. higher in Mainland than in Upland,
and it is the same in Mainland and
Lowland.
65. Consumer goods that are produced, go
into inventory, and are not sold during
the current period are
a. Counted as intermediate goods and so
are not included in current period GDP.
b. Counted in current period GDP only
if the firm that produced them sells them
to another firm.
c. Included in current period GDP as
inventory investment.
d. Included in current period GDP as
consumption.
66. CPI formula = (given year/base year) x
100
67. Cyclical unemployment is closely
associated with
a. Long-term economic growth.
b. Short-run ups and downs of the
economy.
c. Fluctuations in the natural rate of
unemployment.
d. Changes in the minimum wage.
68. A decrease in the money supply might
indicate that the Fed had
a. purchased bonds in an attempt to
increase the federal funds rate.
b. purchased bonds in an attempt to
reduce the federal funds rate.
c. sold bonds in an attempt to increase
the federal funds rate.
d. sold bonds in an attempt to reduce the
federal funds rate.
69. The discount rate is the interest rate that
a. banks charge one another for loans.
b. banks charge the Fed for loans.
c. the Fed charges banks for loans.
d. the Fed charges Congress for loans.
70. Discouraged workers are included in
a. the number of unemployed.
b. frictional unemployment.
c. the labor force.
d. None of the above is correct.
71. During the third quarter of this year a
firm produces consumer goods and adds
some of those goods to its inventory.
During the fourth quarter of this year,
the firm sells the goods at a retail outlet,
with the result that the value of its
inventory at the end of the fourth quarter
is smaller than the value of its inventory
at the end of the third quarter. These
actions affect which component(s) of
fourth-quarter GDP?
a. They increase consumption and have
 no effect on investment 76. The following should be used for
b. They increase consumption and questions 38 - 40. The population of a
decrease investment country is 200 million. Its labor force is
c. They have no effect on either 110 million and there are 106 million
consumption or investment employed.
d. They have no effect on consumption What is the number of unemployed?
and decrease investment a. 90 million.
72. Elizabeth just received her Ph.D. in b. 94 million.
economics and has two competing job c. 106 million.
offers. The first is in Washington, D.C. d. 4 million.
and pays a salary of $200,000. She has a 77. For an imaginary economy, the value of
similar job offer in Austin, TX that pays the consumer price index was 140 in
$90,000. Which pair of CPIs would 2013, and the inflation rate was 5.0
make the two salaries have the same percent between 2013 and 2014. The
purchasing power? consumer price index in 2014 was
a. 70 in Washington, D.C. and 42 in a. 145.0.
Austin, TX b. 147.0.
b. 140 in Washington, D.C. and 70 in c. 135.0.
Austin, TX d. 133.3.
c. 160 in Washington, D.C. and 72 in 78. For any given year, the CPI is the price
Austin, TX of the basket of goods and services in
d. 210 in Washington, D.C. and 150 in the a. given year divided by the price of
Austin, TX the basket in the base year, then
73. Esmerelda worked part-time for her multiplied by 100.
mother's business without pay. Tabitha b. given year divided by the price of the
was absent from work because she had basket in the previous year, then
strep throat. Who is counted as multiplied by 100.
"employed" by the Bureau of Labor c. base year divided by the price of the
Statistics? basket in the given year, then multiplied
a. Esmerelda but not Tabitha by 100.
b. Tabitha but not Esmerelda d. previous year divided by the price of
c. both Esmerelda and Tabitha the basket in the given year, then
d. neither Esmerelda nor Tabitha multiplied by 100.
74. The federal funds rate is the interest rate 79. For the purpose of calculating GDP,
a. the Federal Reserves charges for loans investment is spending on
it makes to the federal government. a. Stocks, bonds, and other financial
b. the Federal Reserve charges banks for assets.
short-term loans. b. Real estate and financial assets such
c. banks charge each other for short- as stocks and bonds.
term loans of reserves. c. Capital equipment, inventories, and
d. on newly issued one-year Treasury structures, including household
bonds. purchases of new housing.
75. The Fed has the power to increase or d. Capital equipment, inventories, and
decrease the number of dollars in the structures, excluding household
economy through the decisions of purchases of new housing.
a. the Board of Governors. 80. GDP = $120,000; consumption =
b. the FOMC. $70,000; private saving = $9,000;
c. the regional Federal Reserve Bank national saving = $12,000.
presidents. Refer to Scenario 26-1. For this
d. the U.S. Treasury. economy, government purchases amount
 to a. increased.
a. $12,000. b. remained stable.
b. $18,000. c. remained stable or decreased.
c. $28,000. d. decreased.
d. $38,000. 86. If an American-based firm opens and
81. GDP = $120,000; consumption = operates a service call center in
$70,000; private saving = $9,000; Bulgaria, then it is engaging in
national saving = $12,000. a. foreign portfolio investment.
Refer to Scenario 26-1. For this b. foreign financial investment.
economy, taxes amount to c. foreign direct investment.
a. $28,000. d. indirect foreign investment.
b. $38,000. 87. If an economy used gold as money, its
c. $41,000. money would be
d. $44,000. a. commodity money, but not fiat
82. GDP = $120,000; consumption = money.
$70,000; private saving = $9,000; b. fiat money, but not commodity
national saving = $12,000. money.
Refer to Scenario 26-1. This economy's c. both fiat and commodity money.
government is running a d. functioning as a store of value and as
a. budget surplus of $3,000. a unit of account, but not as a medium
b. budget surplus of $6,000. of exchange.
c. budget deficit of $3,000. 88. If real GDP was $6,000 billion in 2001
d. budget deficit of $6,000. and the population was 150 million, the
83. GDP is defined as the per capita real GDP would have been
a. Value of all goods and services approximately:
produced within a country in a given a. $6,150 per person.
period of time. b. $40,000 per person.
b. Value of all goods and services c. $9,000 per person.
produced by the citizens of a country, d. $25,000 per person.
regardless of where they are living, in a 89. If the CPI was 104 in 1967 and is 390
given period of time. today, then $10 in 1967 purchased the
c. Value of all final goods and services same amount of goods and services as
produced within a country in a given a. $2.67 purchases today.
period of time. b. $37.50 purchases today. Answer: B
d. Value of all final goods and services 1st yr price/1st yr CPI = x/2nd yr CPI
produced by the citizens of a country, c. $39.00 purchases today.
regardless of where they are living, in a d. $104.00 purchases today.
given period of time. 90. If total spending rises from one year to
84. Greg's Ice Cream produces 1120 gallons the next, then
of ice cream per day. Each employed a. The economy must be producing a
works seven hours and has productivity larger output of goods and services.
of 20 gallons an hour. How many b. Goods and services must be selling at
employees does Greg's employ? higher prices.
a. 160 c. Either the economy must be
b. 56 producing a larger output of goods and
c. 8 services, or goods and services must be
d. None of the above is correct. selling at higher prices, or both
85. Historically, the market prices of most d. Employment or productivity must be
natural resources (adjusted for inflation) rising.
have
91. If you buy a burger and fries at your a. the GDP deflator.
favorite fast food restaurant, b. the CPI.
a. Then neither GDP nor consumption c. The Dow Jones Industrial Average
will be affected because you would have d. The unemployment rate.
eaten at home had you not bought the 97. In the calculation of the CPI, tea is given
meal at the restaurant. greater weight than beer if
b. Then GDP will be higher, but a. the price of tea is higher than the price
consumption spending will be of beer.
unchanged. b. it costs more to produce tea than it
c. Then GDP will be unchanged, but costs to produce beer.
consumption spending will be higher. c. tea is more readily available than beer
d. Then both GDP and consumption to the typical consumer.
spending will be higher. d. consumers buy more tea than beer.
92. In 2009 Buckeye Brewing produced 98. In the long run the unemployment rate
1,000 bottles of ginger ale each day. It equals
employed 10 workers each working 8 a. Zero.
hours a day. In 2010 it produced 960 b. The cyclical rate of unemployment.
bottles of ginger ale each day employing c. The natural rate of unemployment.
8 workers who worked 8 hours each d. The sum of the cyclical and natural
day. Productivity at Buckeye Brewing rate of unemployment.
a. increased by 20%. 99. In the U. S. GDP, imports:
b. increased by 16.67%. a. Include smuggled goods.
c. decreased by 1.67%. b. Are the total of U.S. goods sent
d. decreased by 40%. abroad.
93. An increase in the price of Irish whiskey c. Include black-market goods.
imported into the United States will be d. Are goods purchased from foreign
reflected in sources.
a. both the U.S. GDP deflator and the 100. John and Jane decide to go on a
U.S. CPI. vacation. As a result, they withdraw
b. neither the U.S. GDP deflator nor the $2,500 from their savings account. As a
U.S. CPI. result of this transfer by itself
c. the U.S. GDP deflator, but not the a. M1 increases by $2,500 and M2
U.S. CPI. decreases by $2,500.
d. the U.S. CPI, but not the U.S. GDP b. M1 increases by $2,500 and M2 stays
deflator. the same.
94. Inflation rate = [(2nd year-1st year)/1st c. M1 decreases by $2,500 and M2 stays
year ] x 100 the same.
95. The inflation rate is calculated d. M1 decreases by $2,500 and M2
a. by determining the change in the price decreases by $2,500.
index from the preceding period. 101. Megan is a landscaper. Which of the
b. by adding up the price increases of all following are included in her human
goods and services. capital?
c. by computing a simple average of the a. her knowledge of landscaping learned
price increases for all goods and in college and her landscaping
services. equipment b. her knowledge of
d. by determining the percentage landscaping learned in college, but not
increase in the price index from the her landscaping equipment c. her
preceding period. landscaping equipment, but not her
96. The inflation rate you are likely to hear knowledge of landscaping learned in
on the nightly news is calculated from college d. neither her knowledge of
 landscaping learned in college nor her b. 6.0 percent
landscaping equipment c. 7.2 percent
102. Norberto is opening a bicycle shop, d. 105 percent
and his monthly expenditures to get the 108. The problems with using the
shop up and running exceed his monthly consumer price index as a measure of
income. Norberto is best described as a the cost of living are important because
a. saver or as a supplier of funds. a. even the appearance of high rates of
b. saver or as a demander of funds. inflation cause voters to become
c. borrower or as a supplier of funds. disenchanted. b. politicians have
d. borrower or as a demander of funds. manipulated the measurement problems
103. Over the last ten years productivity to their advantage.
grew faster in Oceania than in Freedonia c. many government programs use the
and the population and total hours CPI to adjust for changes in the overall
worked remained the same in both level of prices.
countries. It follows that d. if the price level is overstated,
a. real GDP per person must be higher in consumers will be taken advantage of by
Oceania than in Freedonia. sellers of consumer goods
b. real GDP per person grew faster in 109. Real GDP is more accurate than
Oceania than in Freedonia. nominal GDP in making comparisons of
c. the standard of living must be higher output over time because:
in Oceania than in Freedonia. a. Nominal GDP can increase simply
d. All of the above are correct. because of price increases over time.
104. The population of a country is 200 b. Real GDP is not affected by output
million. Its labor force is 110 million changes. c. Nominal GDP is the
and there are 106 million employed. hypothetical output that would be
What is the labor-force participation produced at full employment.
rate? d. Real GDP is not affected by changes
a. 96.4 percent. in productivity or the size of the labor
b. 3.6 percent. force.
c. 53.0 percent. 110. Refer to Figure 28-4. If 2,000
d. 55.0 percent. workers are unemployed, then the
105. The population of a country is 200 minimum wage must be
million. Its labor force is 110 million a. $3.
and there are 106 million employed. b. $4.
What is the unemployment rate? c. $5.
a. 3.6 percent. d. $6.
b. 2.0 percent. 111. Refer to Figure 28-4. If the
c. 53.0 percent. government imposes a minimum wage
d. 5.5 percent. of $2, how many workers will be
106. The price index that measures the unemployed?
cost of a basket of goods and services a. 0
bought by firms is called the b. 2,000
a. industrial price index. c. 4,000
b. producer price index. d. 6,000
c. core price index. 112. Refer to Figure 28-4. If the
d. GDP deflator. government imposes a minimum wage
107. The price index was 120 in 2012 and of $6, how many workers will be
126 in 2013. What was the inflation unemployed?
rate? a. 0
a. 5.0 percent b. 2,000
 c. 4,000 the same, the unemployment rate
d. 6,000 a. increases, and the labor-force
113. Refer to Table 29-6. Assume the participation rate decreases.
Fed's reserve requirement is 6 percent b. and the labor-force participation rate
and that the Bank of Springfield makes both increase.
new loans so as to make its new reserve c. increases, and the labor-force
ratio 6 percent. From then on, no bank participation rate is unaffected.
holds any excess reserves. Assume also d. is unaffected, and the labor-force
that people hold only deposits and no participation rate decreases.
currency. Then by what amount does the 119. Scenario 26-1. Assume the following
economy's money supply increase? information for an imaginary, closed
a. $50,200 economy.
b. $80,000 GDP = $120,000; consumption =
c. $72,000 $70,000; private saving = $9,000;
d. $106,000 national saving = $12,000. Refer to
114. Refer to Table 29-6. Assuming the Scenario 26-1. For this economy,
Bank of Springfield and all other banks investment amounts to
have the same reserve ratio, then what is a. $4,000.
the value of the money multiplier? b. $9,000.
a. 5.0 c. $12,000.
b. 7.5 d. $16,000.
c. 10.00 120. Senator Smith says that in order to
d. 12.5 help poor countries develop, the United
115. Refer to Table 29-6. If the Bank of States should: 1. Prevent U.S.
Springfield has lent out all the money it corporations from investing in poor
can given its level of deposits, then what countries because they take profits that
is the reserve requirement? the poor countries should have; 2.
a. 5.00 percent reduce or eliminate subsidizes to U.S.
b. 8.00 percent producers when poor countries have a
c. 8.42 percent comparative advantage producing those
d. 95.00 percent goods the U.S. subsidizes; 3. Work to
116. Refer to Table 29-6. If the Fed promote political stability in poor
requires a reserve ratio of 6 percent, countries; and 4. Reduce poor countries
then what quantity of excess reserves reliance on market forces in their
does the Bank of Springfield now hold? economies. How many of these ideas are
a. $1,200 likely to help poor countries grow?
b. $2,400 a. 1
c. $2,880 b. 2
d. $4,800 c. 3
117. The reserve requirement is 4%, banks d. 4
hold no excess reserves and people hold 121. Suppose U.S.-based Intel
no currency. If the Fed sells $10,000 of Corporation builds and operates a new
bonds what happens to the money computer chip factory in Ghana. Future
supply? production from such an investment
a. it increases by $250,000 would
b. it increases by $200,000 a. increase Ghanaian GDP more than it
c.it decreases by $200,000 would increase Ghanaian GNP.
d.it decreases by $250,000 b. increase Ghanaian GNP more than it
118. Satchel loses his job and immediately would increase Ghanaian GDP.
begins looking for another. Other things c. not affect Ghanaian GNP, but would
 increase Ghanaian GDP. lower real GDP per person than
d. have no affect on either Ghanaian Lowland.
GDP or GNP. 126. When computing the cost of the
122. The term inflation is used to describe basket of goods and services purchased
a situation in which by a typical consumer, which of the
a. the overall level of prices in the following changes from year to year?
economy is increasing. a. the quantities of the goods and
b. incomes in the economy are services purchased
increasing. b. the prices of the goods and services
c. stock-market prices are rising. c. the goods and services making up the
d. the economy is growing rapidly. basket
123. Transfer payments are d. All of the above are correct.
a. Included in GDP because they 127. When the Federal Reserve sells
represent income to individuals. assets from its portfolio to the public
b. Included in GDP because they with the intent of changing the money
eventually will be spent on supply,
consumption. a. those assets are government bonds
c. Not included in GDP because they are and the Fed's reason for selling them is
not payments for currently produced to increase the money supply.
goods or services. b. those assets are government bonds
d. not included in GDP because taxes and the Fed's reason for selling them is
will have to be raised to pay for them. to decrease the money supply.
124. Two countries are the same, except c. those assets are items that are
one is poorer. Assuming the traditional included in M2 and the Fed's reason for
assumption about the production selling them is to increase the money
function is made there are supply.
a. diminishing returns to capital so the d. those assets are items that are
poor country grows slower. included in M2 and the Fed's reason for
b. increasing returns to capital so the selling them is to decrease the money
poor country grows slower. supply.
c. diminishing returns to capital so the 128. When we measure and record
poor country grows faster. economic value, we use money as the
d. increasing returns to capital so the a. liquid asset.
poor country grows faster. b. medium of exchange.
125. Upland has a population of 15,000, c. unit of account.
of whom 9,000 work 8 hours a day to d. store of value.
produce real output of $342,000. 129. Which, if any, pairs of traders has a
Lowland has a population of 8,000, of double coincidence of wants?
whom 7,000 work 7 hours a day to a. Bob with Alice
produce real output of $171,500. b. Ted with Alice
a. Upland has higher productivity and c. Bob with Mary, Ted with Bob, and
higher real GDP per person than Ted with Alice
Lowland. d. None of the pairs above has a double
b. Upland has higher productivity but coincidence of wants.
lower real GDP per person than 130. Which of the following correctly lists
Lowland. what is included in the consumption
c. Upland has lower productivity but component of GDP?
higher real GDP per person than a. Household purchases of services and
Lowland. household purchases of nondurable
d. Upland has lower productivity and goods but not any household purchases
 of durable goods c. GDP is generally regarded as the best
b. Household purchases of nondurable single measure of a society's economic
goods and durable goods other than wellbeing.
residential construction but not d. All of the above are correct.
household purchases of services 135. Which of the following statements is
c. Household purchases of services, correct about the relationship between
nondurable goods, and all durable goods the nominal interest rate and the real
d. Household purchases of services, interest rate?
nondurable goods, and durable goods a. The real interest rate is the nominal
other than residential construction interest rate times the rate of inflation.
131. Which of the following does the b. The real interest rate is the nominal
Federal Reserve not do? interest rate minus the rate of inflation.
a. It controls the supply of money. c. The real interest rate is the nominal
b. It acts as a lender of last resort to interest rate plus the rate of inflation.
banks. d. The real interest rate is the nominal
c. It makes loans to any qualified interest rate divided by the rate of
business that requests one. inflation.
d. It tries to ensure the health of the 136. Which of the following transactions
banking system. would be included in GDP for 2015?
132. Which of the following is an example a. In February 2015, Amanda sells a
of a renewable natural resource? 2009 Hyundai to Isabella.
a. fish b. In March 2015, Amanda buys a ticket
b. soybeans to visit a zoo in Florida. She visits the
c. wood zoo in February 2016.
d. All of the above are correct. c. In November 2015, Isabella eats
133. Which of the following is included in onions that she harvested from her
GDP? backyard garden in October 2015.
a. The market value of rental housing d. All of the above are correct.
services, but not the market value of 137. Which tool of monetary policy does
owner-occupied housing services. the Federal Reserve use most often?
b. The market value of owner-occupied a. term auctions
housing services, but not the market b. open-market operations
value of rental housing services c. changes in reserve requirements
c. Both the market value of rental d. changes in the discount rate
housing services and the market value of 138. You and your friend work together
owner-occupied housing services for 4 hours to produce a total of 12
d. Neither the market value of owner- futons. What is productivity?
occupied housing services nor the a. 12 futons
market value of rental housing services. b. 24 futons
134. Which of the following statements c. 3 futons per hour of labor
about GDP is correct? d. 1.5 futons per hour of labor
a. GDP measures two things at once: the 139. Assume that a 4 percent increase in
total income of everyone in the income results in a 2 percent increase in
economy and the total expenditure on the quantity demanded of a good. The
the economy's output of goods and income elasticity of demand for the
services. good is positive, and the good is a
b. Money continuously flows from normal good.
households to firms and then back to 140. At the broadest level, the financial
households, and GDP measures this system moves the economy's scarce
flow of money. resources from savers to borrowers.
141. Babe Ruth, the famous baseball
player, earned $80,000 in 1931. Today,
the best baseball players can earn more
than 400 times as much as Babe Ruth
earned in 1931. However, prices have
also risen since 1931. We can conclude
that one cannot determine whether
baseball stars today enjoy a higher
standard of living than Babe Ruth did in
1931 without additional information
regarding increases in prices since 1931
142. The Bureau of Labor Statistics
counts a member of a surveyed
household as an adult if that person is at
least 16 years old.
143. The Bureau of Labor Statistics places
people in the "employed" category if
they are without a job, but are available
for work and have tried to find a job
during the previous 4 weeks.
144. Changes in real GDP reflect only
changes in the amounts being produced.
145. The consumer price index is used to
monitor changes in the cost of living
over time.
146. The consumption component of GDP
includes spending on durable goods,
nondurable goods, and services
147. Countries with low gdp per person
tend to have higher rates of infant
mortality.
148. A country is likely to have a higher
sacrifice ratio if contracts are shorter,
and people believe the central bank will
not reduce inflation
149. Efficiency wages create a labor
surplus and so increase unemployment.
150. Which of the following is not a stock
variable?A. government debt B. the
labor forceC. the amount of money held
by the public D. inventory investment
Correct. The answer is D. Inventory
investment is a quantity measured per
unit time, so it is a flow variable.
151. Gross domestic product (GDP) isA. a
stock.B. a flow.C. both a stock and a
flow.D. neither a stock nor a flow.
Correct. The answer is B. GDP is a
quantity measured per unit time, so it is
a low.
152. GDP measuresA. expenditure on all
final goods and services.B. total income
of everyone in the economy.C. total
value added by all firms in the
economy.D. all of the above. Correct.
The answer is D. See Section 2 for a
discussion of what GDP measures.5 of
30
153. Suppose that a farmer grows wheat
and sells it to a baker for $1, the baker
makes bread and sells it to astore for $2,
and the store sells it to the customer for
$3. This transaction increases GDP byA.
$1.B. $2.C. $3.D. $6. Correct. The
answer is C. GDP includes only the
value of the inal goods and services.
Therefore, this transaction increases
GDP by $3.6 of 30
154. Which of the following is not
included in GDP?A. the salary paid to a
federal judgeB. the value of housing
services enjoyed by homeownersC. the
value of automobile services enjoyed by
car ownersD. the value added by a
shipping company that transports goods
from the factory to retail storesCorrect.
The answer is C. In principle, GDP
should include the imputed rent on
automobiles, but in practice it does not.
155. In which case is total expenditure in
an economy not equal to total income?
A. If total saving is larger than total
investment.B. If net exports are not
zero.C. If inventory investment is
negative.D. None of the above they are
always equal.Correct. The answer is D.
Total expenditure in an economy always
equals total income.8 of 30
156. All other things equal, GDP will rise
if A. imports rise.B. exports fall.C.
durable goods consumption rises
D. military spending falls.
Which of the following statements describes
the difference between real and nominal
GDP?A. Real GDP includes only goods;
nominal GDP includes goods and services.B.
Real GDP is measured using constant base-
year prices; nominal GDP is measured using
current prices.C. Real GDP is equal to
nominal GDP less the depreciation of the
capital stock.D. Real GDP is equal to
nominal GDP multiplied by the CPI.Correct.
The answer is B.
/. If production remains the same and all
prices double, then real GDPA. and nominal
GDP are both constant.B. is constant and
nominal GDP is reduced by half.C. is
constant and nominal GDP doubles.D.
doubles and nominal GDP is
constant.Correct. The answer is C. Real GDP
is measured in constant prices, so it is
unaffected by a price increase. NominalGDP
is measured in current prices. If prices
double, so will nominal GDP. -
/. Real GDP equalsA. nominal GDP minus
net exports.B. nominal GDP divided by the
GDP deflator.C. nominal GDP multiplied by
the GDP deflator.D. GDP minus
depreciation.The answer is B.
/. If production remains the same and all
prices double relative to the base year, then
the GDP deflator is A. 1/4. B. 1/2. C.1. d. 2.
/. To obtain the net national product (NNP),
start with the gross national product (GNP)
and subtract A. depreciation.B. depreciation
and indirect business taxes.C. depreciation,
indirect business taxes, and corporate
profits.D. depreciation, indirect business
taxes, corporate profits, and social insurance
contributions.The answer is A.
/.To obtain national income, start with GNP
and subtract A. depreciation.B. depreciation
and the statistical discrepancy.C.
depreciation, indirect business taxes, and
corporate profits.D. depreciation, indirect
business taxes, corporate profits, and social
insurance contributions.Correct. The answer
is B. National income equals GNP minus
depreciation and statistical discrepancy.
/. Approximately what percentage of national
income consists of compensation of
employees? A. 10 percent B. 25 percent C.
70 percent D. 95 percent
/. Which of the following is not considered
investment?A. A family builds a house in
which it plans to live.B. A car dealer stores
some of this year's models for next year.C.
An individual purchases several pieces of
antique furniture.D. A firm buys a computer
for word processing.
/. Suppose that Jones builds a new house,
then she sells it to Smith, and then Smith
sells it to Williams. Thetotal net investment
from these transactions isA. zero.B. 1 house.
C. 2 houses.D. 3 houses.
/. The consumer price index (CPI)A.
measures the price of a fixed basket of goods
and services.B. measures the price of a
basket of goods and services that constantly
changes as the composition of consumer
spending changes.C. measures the amount of
money that it takes to produce a fixed level
of utility.D. is one of the many statistics in
the National Income Accounts.
/.Suppose that the typical consumer buys one
apple and one orange every month. In the
base year 1986,the price foreach was $1. In
1996, the price of apples rises to $2, and the
price of oranges remains at $1. Assumingthat
the CPI for 1986 is equal to 1, the CPI for
1996 would be equal toA. 1/2.B. 1.C. 3/2.D.
2.
/. Which of the following statements about
the CPI and the GDP deflator is true?A. The
CPI measures the price level; the GDP
deflator measures the production of an
economy.B. The CPI refers to a base year;
the GDP deflator always refers to the current
year.C. The weights given to prices are not
the same.D. The GDP deflator takes the price
of imported goods into account; the CPI
does not.
Equilibrium price must increase when
demand increases and supply does not
change, when demand does not change and
supply decreases, and when demand
increases and supply decreases
simultaneously.
Fiat money has no intrinsic value
Fiscal policy refers to the idea that aggregate
demand is affected by changes in
government spending and taxes.
For a good that is a luxury, demand
tends to be elastic.
For the purpose of calculating GDP,
investment is spending on
capital equipment, inventories, and
structures, including household purchases of
new housing
Frictional unemployment is inevitable,
because at any given time, jobs are being
created in some firms and destroyed in other
firms.
GDP is used to monitor the performance of
the overall economy and is the single best
measure of a society's economic well-being.
GDP does not reflect the value of leisure.
the value of goods and services produced at
home. the quality of the environment.
All of the above are correct.
GDP is defined as the value of all final
goods and services produced within a
country in a given period of time.
Grapes are considered intermediate goods
if the purchaser uses them to make wine to
sell others but not if the purchaser eats them.
Household spending on education is
included in consumption, although it might
be argued that it would fit better in
investment.
The identity that shows that total income and
total expenditure are equal is Y = C + I + G
+ NX.
If 2002 is the base year, then the inflation
rate in 2005 equals CPI 2005-CPI 2002/CPI
2002
If 2004 is the base year, then the inflation
rate for 2005 equals CPI 2005-CPI 2004/CPI
2004
If an economy uses silver as money, then
that economy's money is commodity money.