Chapter 1

Using the CPI measure of the price level, which is 100 in the base year of 2001, calculate the annual inflation rates for (a) 2002, when the index is 103.7. (b) 2003, when the index is 105.5. (c) 2004, when the index is 107.7.

(a) Inflation in 2002 = (103.7 - 100)/100 × 100% = 3.7%. (b) Inflation in 2003 = (105.5 - 103.7)/100 × 100% = 1.7%. (c) Inflation in 2004 = (107.7 - 105.5)/100 × 100% = 2.1%.

If the price level was 100 in 1999 and 102 in 2000, the inflation rate was

2%.

Which of the following best describes a typical business cycle?

Economic expansions are followed by economic contractions

How did Keynes propose to solve the problem of high unemployment?

Have the government increase its demand for goods and services.

Average labor productivity is the

amount of output per worker

When national output rises, the economy is said to be in

an expansion

A central bank is an institution that

controls a nation's monetary policy

A closed economy is a national economy that

doesn't interact economically with the rest of the world

A country that has many well-trained macroeconomic analysts will not necessarily have more beneficial macroeconomic policies because

economic policy is usually made by politicians, not economists

Positive analysis of economic policy

examines the economic consequences of policies but does not address the question of whether those consequences are desirable

A country has a trade surplus when

exports exceed imports

Classical economists argue that

government policies will be ineffective and counterproductive

The main reason that the United States has such a high standard of living is

high average labor productivity

A country has a trade deficit when

imports exceed exports

The main goal of macroeconomic research is to

make general statements about how the economy works

The inflation rate is the

percent increase in the average level of prices over a year.

Keynes assumed that wages and prices were slow to adjust in order to explain

persistently high unemployment

What are the major factors affecting the long-term growth of the economy's output?

population growth and average labor productivity

The two major reasons for the tremendous growth in output in the U.S. economy over the last 125 years are

population growth and increased productivity

A country is said to be experiencing inflation when

prices of most goods and services are rising over time

U.S. imports are goods and services

produced abroad and sold to Americans

Equilibrium in the economy means

quantities demanded and supplied are equal in all markets

During recessions, the unemployment rate ___________ and output ___________

rises; falls

Aggregation is the process of

summing individual economic variables to obtain economywide totals

In the United States, monetary policy is determined by

the Federal Reserve

Short-run contractions and expansions in economic activity are called

the business cycle

The two most comprehensive, widely accepted macroeconomic models are

the classical model and the Keynesian model

The most direct effect of an increase in the growth rate of average labor productivity would be an increase in

the long-run economic growth rate

The number of unemployed divided by the labor force equals

the unemployment rate

Critics of the government's fiscal policies argued that government deficits

were linked to the excess of imports over exports that occurred in the 1980s