ECON 1002: Chapter 9 (Business Cycles, Unemployment, and Inflation)

If real economic growth is 3%, the inflation rate is 5%, and the nominal interest rate is 7%, then the real rate of interest is:

2% Reason: The real rate of interest is equal to the nominal interest rate minus the rate of inflation. In this case, 7% - 5% equals 2%.

What type of inflation allows people to plan ahead and avoid or lessen the redistribution effects of inflation?

Anticipated inflation.

Which statements describe how even low levels of inflation may negatively affect real output?

Businesses incur the costs of changing prices to reflect inflation. Households and businesses spend time and effort distinguishing between real and nominal wages and interest rates.

Which of the following are excluded from core inflation so that it better reflects the general trend in overall prices?

Energy products Food items

According to some economists, which of the following are positive effects of mild inflation?

Firms have an incentive to expand their plants and equipment. Firms will have a strong demand for labor. (Firms can more easily adjust real wages downward when the demand for their products declines.)

Which of the following are consequences of the widespread joblessness of cyclical unemployment?

Greater ethnic tensions Lower morale Increased poverty

Which of the following could be considered a cost of cyclical unemployment?

Higher crime, suicide, and divorce rates Political upheaval Severe psychological costs to the job loser

Which statement best describes U.S. inflation since 2000?

It has been neither very high nor very low.

How is cost-push inflation unique?

It reduces the overall quantity of real output.

______ income will be affected if the change in the price level differs from the change in a person's nominal income.

Real

What are the results of unanticipated inflation?

Some people are harmed and others are helped. Wealth and real income are redistributed.

What does the Consumer Price Index (CPI) measure?

The prices of a fixed "market basket" of goods and services.

What are the effects of unanticipated deflation?

The real incomes of people with fixed nominal incomes will increase. The purchasing power of savings will increase. Creditors will benefit at the expense of debtors.

True or false: Hyperinflation is extraordinarily rapid inflation.

True.

True or false: In the United States, inflation reached double-digit rates in the 1970s and early 1980s but has since declined and recently, has been relatively mild.

True.

Which of the following statements best summarizes how inflation may redistribute real income?

When a change in the price level differs from a change in a person's nominal income.

Business cycles are ______.

alternating increases and decreases in economic activity

A business cycle consists of ______.

alternating rises and declines in the level of economic activity

Cost-of-living adjustments are ______.

automatic wage changes that happen when the CPI rises

A key issue in macroeconomics is why the economy sees ______.

business cycle fluctuations rather than slow, smooth growth

Firms and industries producing capital goods are affected most by the business cycle and the negative effects of a recession because purchases of capital goods ______.

can be postponed

The index most widely used by the government and the private sector to measure changes in the cost of living is the:

consumer price index

Social security payments automatically increase when the CPI goes up because of the ______.

cost of living adjustments

Inflation caused by an increase in the per-unit production costs at each level of total spending is called:

cost-push.

Which of the following group of people are hurt by unanticipated inflation?

creditors fixed-income recipients savers

Economists say that the economy is at "full employment" when the ______ unemployment rate is zero.

cyclical

The business cycle affects output and employment in capital and durable goods industries more severely than in industries producing non-durable goods because, ______.

during a recession, business investment in new capital goods and consumer spending on new durable goods can be postponed

The labor force is the sum of the ______ and ______. Multiple choice question.

employed; unemployed

An economy is "fully employed" when the unemployment rate _____.

equals the structural and frictional unemployment rate (meaning no cyclical unemployment)

During hyperinflation, the value of money:

falls rapidly.

Workers that are unemployed because they are "between jobs" are:

frictionally unemployed

The difference between actual and potential GDP is called a GDP ____.

gap

Unanticipated inflation ______ fixed-income recipients, savers, and creditors.

hurts

Real interest rates are the ______.

interest rates quoted in the market minus the expected inflation rate Reason: nominal interest rate = real interest rate + inflation premium/expected rate of inflation (so re-arrange lol)

Why the economy sees business cycle fluctuations rather than slow, smooth growth is a central issue of ______.

macroeconomics

Food and energy prices often complicate the measurement of inflation because supply and demand for these products ______.

often change, creating temporary changes in prices

The basic economic cost of unemployment is forgone ______.

output

The phase of the business cycle at which the economy is at or near full employment is known as a(n) _____.

peak

The phase of the business cycle when the economy is near or at full employment and the level of real output is at or near capacity is called a:

peak.

A GDP gap equals actual GDP minus (one word) _____ GDP.

potential

Inflation redistributes:

real income.

Inflation ______ the purchasing power of money.

reduces

Cost-push inflation can contribute to a recession by increasing prices, which ______.

reduces output and leads to lower employment

The labor force is the ______.

sum of the employed and unemployed

Inflation is a problem because when it occurs:

the "purchasing power" of money is reduced.

Cost-push inflation is caused by an increase in ______.

the per-unit production costs at each level of spending

Deflation occurs when there is a decline in ______.

the price level

Frictional unemployment is defined as a type of unemployment that is caused by workers who ______.

unemployed as they actively search for a new job.

Forgone output is a basic economic cost of ______.

unemployment