Chapter 6 An Introduction to Macroeconomics B

In 2009, output per person in the U.S was about

$46,000 per year

One principle of economic growth is the notion that, to raise living standards over time, an economy must:

Devote some portion of its current output to increasing its future output

The term "shock":

Does not tell us whether what has happened is unexpectedly bad or unexpectedly good

Many economists believe that over several decades before the Great Recession occurred:

Economic fluctuations have become much less severe because of the introduction of computerized inventory tracking systems

Which of the following statements is true?

Economic investment refers to the creation and expansion of business enterprises

The Industrial Revolution began in:

England in the late 1700's

In earlier centuries, the Roman and Chinese economies:

Expanded but output per person remained virtually stagnant

If a family's income increases by 5% at the same time that inflation is 3.5%, then the:

Family will need to spend more in order to maintain its standard of living

Which of the following statements about price wars is true?

Firms that have to deal with the possibility of price wars often have sticky prices.

If prices of goods and services quickly adjust to demand shocks, then:

Firms would find it easier to produce at their optimal output rates

Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a positive demand shock?

Firms' inventories will decrease, causing them to increase production. Ultimately, real GDP will increase and unemployment will decrease.

Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a negative demand shock?

Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.

Which of the following is the principal source of savings in an economy?

Households

Macroeconomic models help clarify important questions such as the following, except:

How will OPEC manipulate and maintain the price of crude oil in the world markets?

Which of the following statements is true?

If prices were fully flexible, there would be no short-run economic fluctuations

Which of the following statements about price stickiness or flexibility is true?

Prices of many raw materials are much more flexible than the prices of final goods and services

The major statistics that provide macroeconomists a picture of the health of an economy include the following, except:

Prices of oil and gasoline

During the Great Recession, the U.S. car companies experienced a demand shock, and as it turned out:

Production fell because prices were sticky

Inventories:

Tend to reduce the severity of short-run fluctuations

Business cycle fluctuations typically arise because:

The actual demand for goods and services ends up being more or less than what firms were expecting

Economists need different models of the economy because:

The economy behaves differently depending on how much time has passed after a demand shock

If prices are "sticky" in the short run, then:

The economy will respond to demand shocks primarily through changes in output and employment

Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. How will the firm respond to a negative demand shock if prices are flexible?

The firm will continue to produce 500 computers per week and charge a price of $600

Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. How will the firm respond to a positive demand shock if prices are inflexible?

The firm will increase production to 650 computers per week and charge a price of $1000

Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. What happens to the firm's inventory of computers if there is a negative demand shock and prices are inflexible?

The firm's inventories will increase by 200 computers per week

Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. What happens to the firm's inventory of computers if there is a negative demand shock and prices are flexible?

The firm's inventories will not change

Which of the following markets is most likely to exhibit extremely flexible prices?

The oil market

Refer to the graph above. Which of the following best represents negative demand shock when prices are inflexible?

The shift from D2 to D1 in graph A

Refer to the graph above. Which of the following best represents a positive demand shock when prices are flexible?

The shift from D2 to D3 in graph B

In macroeconomic models, prices are assumed to be completely inflexible in:

The very short run only

Computerized inventory tracking has enabled businesses to do the following, except:

Wait a longer period before adjusting production levels to changes in demand

Before computers, businesses counted their inventory so infrequently that changes in production needed to respond to changes in demand:

Were quite sharp

Firms that choose to use a fixed-price policy:

Will tend to experience larger inventory changes than firms that follow a flexible-price policy

Inflation is troublesome to consumers because of the following effects, except:

Workers' wages may be rising faster than the overall prices

The situation where output and living standards decline is referred to as

a recession

Which of the following is most likely to be an indication of higher unemployment?

A decrease in real GDP

Because prices are sticky, positive demand shock will lead to:

A decrease in unemployment

Which of the following is NOT a factor that increases short-run price stickiness?

A firm can lower its price without fear that rival firms will also lower their prices

If prices of goods and services are free to quickly adjust, then:

A negative demand shock would have no short-run effect on unemployment

If prices of goods and services are inflexible, then:

A positive demand shock would lead to increased real GDP in the short run

Which of the following is the best example of investment as defined by economists?

A restaurant owner buys a freezer to store ingredients for the restaurant meals

Which of the following is the best example of financial investment?

A retiree purchases Google stock

If prices are inflexible, then a negative demand shock will lead to:

A short-run decrease in real GDP

Inventories rise when:

Actual demand for output is less than expected

Purchasing power parity refers to

Adjusting GDP figures for the fact that prices are much lower in some countries than in others

Which of the following is not an adjustment made when comparing standards of living across countries?

Adjusting for different unemployment rates across countries

The so-called Great Recession in the U.S. occurred in:

2007-2009

Which of the following is the best example of economic investment?

Apple builds a new plant to manufacture iPads

High rates of unemployment are undesirable because they:

Are associated with higher levels of crime and illness

Economists believe that most short-run fluctuations:

Are the result of demand shocks

Before the late 1700's, living standards in the richest part of the world were

At most only two to three times higher than living standards in the poorest parts of the world

Which among the following countries had the highest GDP per person in 2009?

Canada

The amount of investment is ultimately limited by the amount of:

Capital

Decisions about savings and investment are:

Complicated by the fact that the future is uncertain

There is a trade-off between:

Current consumption and future consumption

High rates of unemployment:

Indicate that society is not using a large portion of the talent and skills of its people

An increase in the overall level of prices is called:

Inflation

Rapid and sustained economic growth of nations:

Is a modern phenomenon

Modern economic growth:

Makes a country's output per person rise at a compounded rate

Increased optimism about the future will lead to:

More current investment and more future consumption

Which of the following best represents the effect of an increase in investment?

Moving from point b to point d

If consumers become pessimistic, the economy is likely to experience a:

Negative demand shock

Sharply rising oil prices are most likely to lead to a:

Negative supply shock

For which of the following goods is the price least likely to be flexible?

Newspapers

Suppose a small economy produces only HD TV sets. In year 1, 100,000 sets are produced and sold at a price of $1,200 each. In year 2, 100,000 sets are produced and sold at a price of $1,000 each. As a result

Nominal GDP decreases, while real GDP stays constant

Savings:

Occur when current spending is less than current incomes

Price wars:

Occur when one firm lowers its price and rival firms react by lowering their prices

Under modern economic growth, the annual average increase in output per person is

Often not large, perhaps 2% per year

Suppose that real GDP increases by 5% while the population of a country increases by 7%. Then

Output per person necessarily decreases

An increase in worker productivity will lead to a:

Positive supply shock

Suppose a small economy produces only MP3 players. In year 1, 10,000 MP3 players are produced and sold at a price of $100 each. In year 2, 12,000 MP3 players are produced and sold at a price of $80 each. Which of the following statements is true?

Real GDP increases while nominal GDP decreases

What impact will a negative demand shock have on the main measures of economic performance?

Real GDP will decrease, inflation will decrease, and unemployment will increase

What impact will a negative supply shock have on the main measures of economic performance?

Real GDP will decrease, inflation will increase, and unemployment will increase

Savings are transferred from savers to borrowers through the following intermediaries, except:

Real estate brokers

For many decades prior to the Industrial Revolution, the standards of living in England and China:

Remained roughly constant

Investment happens when:

Resources are devoted toward increasing future output

Situations in which firms expect one thing to happen but then something else happens are called:

Shocks

In economics, the word "shocks" refers to:

Situations where firms' expectations are not met

Short-run fluctuations in output and employment are referred to as

business cycles

Nominal gross domestic product

can change when there is a change in either output or the price level

Real gross domestic product

measures the value of final goods and services produced within the borders of a given country during a given time period corrected for changing prices

Nominal gross domestic product

measures the value of final goods and services produced within the borders of a given country during a given time period using current prices

Economists and policy makers are committed to encouraging a large and growing real GDP because

more output means greater consumption opportunities

Suppose that an economy's output does not change from one year to the next, but the price level doubles. What happens to nominal GDP?

nominal GDP doubles

Suppose that an economy's output does not change from one year to the next, but the price level doubles. What happens to real GDP?

real GDP doesn't change

Suppose that inventories are rising. We could expect that, in the future

real GDP will likely decrease

Suppose a family's income increases by 5% at the same time that inflation is 6%. Then

the family's standard of living will fall

Suppose that inventories are falling. We could expect that, in the future

unemployment will likely decrease

Real gross domestic product

will increase if there is an increase in the level of output