Unit 2 exam: 20-50

Investment spending in the United States tends to be unstable because: -capital wears out quickly and must be replaced often. -the price level fluctuates rapidly. -profits are highly variable. -investment spending is affected by interest rates.

profits are highly variable.

(Consider This) According to the Consider This box on patents and innovation, the cost for U.S. and European drug companies to research, patent, and safety-test a new drug is about: $10 billion. $100 million. $750 million. $1 billion.

$1 billion.

Refer to the given data. If disposable income was $325, we would expect consumption to be: $290. $305. $315. $20.

$305.

If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is: $990 billion. $10 billion. $510 billion. $490 billion.

$510 billion.

If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is: 2. 5. 10. 3.33.

2

Refer to the given diagram. The economy is dissaving: -at income level H. -at income level E. -at all income levels greater than E. -in the amount CD.

at income level H.

According to the Bureau of Labor Statistics, to be officially unemployed a person must: -be in the labor force. -be waiting to be called back from a layoff. -have lost a job. -be 21 years of age or older.

be in the labor force.

Given the annual rate of inflation, the "rule of 70" allows one to: -determine whether the inflation is demand-pull or cost-push. -calculate the number of years required for the price level to double. -determine when the value of a real asset will approach zero. -calculate the accompanying rate of unemployment.

calculate the number of years required for the price level to double.

Answer the question on the basis of the following information about a hypothetical economy: Refer to the given information. The rate of inflation: -is 110 percent. -cannot be determined from the data. -is 0 percent. -is 10 percent.

cannot be determined from the data.

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are: -clothing and education. -capital goods and durable consumer goods. -military goods and capital goods. -services and nondurable consumer goods.

capital goods and durable consumer goods.

The multiplier is useful in determining the: -change in the rate of inflation from a change in the interest rate. -level of business inventories. -full-employment unemployment rate. -change in GDP resulting from a change in spending.

change in GDP resulting from a change in spending.

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase: -GDP by $20 billion. -saving by $25 billion. -GDP by $120 billion. -consumption by $80 billion.

consumption by $80 billion.

Tessa's break-even income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000, her level of: -saving will be $2,500. -consumption spending will be $13,000. -consumption spending will be $14,500. -consumption spending will be $15,500.

consumption spending will be $14,500.

The production of durable goods varies more than the production of nondurable goods because: -the producers of nondurables have monopoly power. -durables purchases are postponable. -durables purchases are nonpostponable. -producers of durables are highly competitive.

durables purchases are postponable.

The immediate determinants of investment spending are the: -level of saving and the real interest rate. -expected rate of return on capital goods and the real interest rate. -marginal propensity to consume and the real interest rate. -interest rate and the expected price level.

expected rate of return on capital goods and the real interest rate.

An unexpected increase in total spending will cause an increase in GDP: -only if prices are stuck in the long term. -if prices are sticky. -regardless of whether prices are sticky or fully flexible. -if prices are fully flexible.

if prices are sticky.

The consumption schedule is drawn on the assumption that as income increases, consumption will: -increase absolutely but decline as a percentage of income. -increase both absolutely and as a percentage of income. -increase absolutely but remain constant as a percentage of income. -be unaffected.

increase absolutely but decline as a percentage of income.

The multiplier applies to: -investment but not to net exports or government spending. -increases in spending but not to decreases in spending. -spending by the private sector but not by the public sector. -investment, net exports, and government spending.

investment, net exports, and government spending.

Structural unemployment: -is the main component of cyclical unemployment. -is said to occur when people are waiting to be called back to previous jobs. -may involve a locational mismatch between unemployed workers and job openings. -is also known as frictional unemployment.

may involve a locational mismatch between unemployed workers and job openings.

The unemployment rate is the: -percentage of the total population that is unemployed. -ratio of unemployed to employed workers. -number of employed workers minus the number of workers who are not in the labor force. -percentage of the labor force that is unemployed.

percentage of the labor force that is unemployed.

The consumption schedule shows: -that households consume more when interest rates are low. -that the MPC increases in proportion to GDP. -that consumption depends primarily on the level of business investment. -the amounts households intend to consume at various possible levels of aggregate income.

the amounts households intend to consume at various possible levels of aggregate income.

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Refer to the given data. If the unemployment rate in the economy fell to 6 percent, we could conclude that: -nominal GDP would rise, but real GDP would fall. -the economy's production possibilities curve shifted outward. -only structural unemployment remained. -the economy had moved from a point inside its production possibilities curve to a point on or very near the curve.

the economy had moved from a point inside its production possibilities curve to a point on or very near the curve.

(Consider This) During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that: -the investment demand curve shifted inward. -firms were optimistic about future sales. -the investment demand curve was positively sloped during this period. -purchases of capital from abroad increased, and these were not reflected in investment spending figures for that period.

the investment demand curve shifted inward.

(Last Word) Art Buchwald's article "Squaring the Economic Circle" is a humorous description of: -the marginal propensity to save. -a negative GDP gap. -a positive GDP gap. -the multiplier.

the multiplier.

Proponents of economic growth make all of the following arguments except: -there is a direct relationship between a growing real GDP and rising pollution. -growth provides an economic environment favorable to education and self-fulfillment. -growth is the basic means of improving living standards. -it is easier to reduce poverty when the economy is growing than when it is not.

there is a direct relationship between a growing real GDP and rising pollution.