Exam 19-24

The simple multiplier can be numerically expressed as:

1/(1-MPC)

The GDP of a country in a particular year is $450 million. If the government of this country pays subsidies worth $20 million and receives taxes worth $50 million, its disposable income will be _____.

b. $420 million Disposable income = GDP − taxes + subsidies = $450 million − $50 million + $20 million = $420 million.

The Bureau of Economic Analysis (BEA) reports that the nominal GDP is currently $6.4 trillion and that GDP in dollars in terms of1 997 purchasing power is $4.8 trillion. This implies that the GDP price index for the current year is:

b. 133.3. Feedback: Correct. GDP price index = (nominal GDP/real GDP) × 100 = (6.4/4.8) × 100 = 133.3.

If the nominal interest rate is 9 percent and the inflation rate is 3 percent, the real interest rate is _____.

b. 6 percent The real interest rate equals the nominal interest rate minus the inflation rate:Real interest rate = nominal interest rate - inflation rateReal interest rate = 9 percent - 3 percentReal interest rate = 6 percent

There are 150 people who live on a small island. 70 people have jobs, 15 are looking for jobs, and 65 people are retired. The number of people in the labor force is:

b. 85. Feedback: Correct. The labor force consists of people who are working or looking for a job. In this example, 70 people have jobs and 15 are looking for jobs. So, the number of people in the labor force is 70 + 15 ═ 85.

Which of the following is the effect of a small change in the rate of productivity growth?

b. A limited impact on output in the short run but a huge impact in the long run

Identify the correct definition of a discouraged worker.

b. A person who drops out of the labor force because he or she is unable to find a job Feedback: Correct. A discouraged worker is a person who drops out of the labor force in frustration because he or she is unable to find a job.

Which of the following is likely to occur if the actual output produced in an economy is less than the economy's potential output?

b. A recessionary gap and an unemployment rate that is higher than the natural rate of unemployment If the actual output produced in an economy is less than the economy's potential output, a recessionary gap occurs. This pushes the price level below the expected level and raises the unemployment rate above the natural rate of unemployment.

Which of the following most likely triggered the Great Depression of the 1930s in the United States?

b. A stock market crash Most economists agree that the stock market crash of 1929 had triggered the Great Depression in the U.S.

Identify a factor that can lead to long-term growth in an economy.

b. An improvement in the quality of resources Feedback: Correct. An economy's standard of living improves over the long run due to increases in the amount and quality of resources like labor and capital.

_____ will shift the current consumption function upward.

b. An increase in stock prices An increase in stock prices will increase the net wealth of households and increase their desire to spend at each income level. This will cause an upward shift of the consumption function.

Which of the following is likely to result from a personal tax incentive provided by government?

b. An increase in total government revenues A lower tax rate creates an economic incentive to increase aggregate supply, which in turn increases output and employment.

Which of following situations contributed to the change in aggregate demand in the U.S. economy during the Great Depression?

b. An increase in trade restrictions in the form of tariffs The decline in aggregate demand during the Great depression was caused by grim business expectations that cut investment, reduced consumer spending, bank failures, a drop in the nation's money supply, and restrictions on world trade with high tariffs.

_____ had the highest percentage of adults between 25 and 64 years of age with at least a degree beyond high school in 2012.

b. Canada

_____ tends to understate the actual amount of unemployment.

b. Counting overqualified and part-time workers as employed Counting overqualified and part-time workers as employed tends to understate the actual amount of unemployment. This problem arises because people are counted as employed even if they are vastly overqualified for their jobs or are working part time.

_____ is the primary determinant of a household's consumption expenditure.

b. Disposable income Feedback: Correct. The disposable income of a household is the primary determinant of the household's consumption expenditure and there exists a positive, stable relationship between the two variables.

_____ is an example of a newly industrialized country.

a. Singapore

In the double-entry bookkeeping system used to track national income, _____.

a. expenditure on aggregate output is equal to income received from producing that aggregate output In the double-entry bookkeeping system used to track the economy, spending on aggregate output is always equal to income from producing that aggregate output.

Kate pays $20 for a leather jacket on sale at Leather World. The raw materials used for making the jacket probably cost $10. The value added to GDP by the purchase of this jacket is:

a. $10. Feedback: Correct. The value added by each firm equals that firm's selling price minus payments for inputs purchased from other firms.

Identify the effect of an increase in the price level on the aggregate expenditure line and the aggregate demand curve of an economy.

a. A downward shift of the aggregate expenditure line and an upward movement along the aggregate demand curve Feedback: Correct. An increase in the price level reduces consumption, investment, and net exports. Therefore, the aggregate expenditure line shifts downward. The aggregate demand curve shows the relationship between the price level and the quantities of real gross domestic product demanded. So, a rise in the price level leads to an upward movement along the aggregate demand curve for an economy.

Identify an impact of a leftward shift in the aggregate demand curve.

a. An increase in the unemployment level A leftward shift of the aggregate demand leads to a decrease in the price level and an increase in the total unemployment in the economy.

_____ is an example of a developing country.

a. Colombia Feedback: Correct. Developing countries are those which have a lower living standard because of limited human and physical capital per worker. Colombia is an example of a developing country.

Which of the following is true in the long run if an economy experiences an expansionary gap?

a. Cost of production rises, and the short-run aggregate supply curve shifts leftward. If an economy experiences an expansionary gap, the actual output exceeds the potential output and the actual price level is higher than expected. Workers try to negotiate a higher nominal wage rate in the long run, which increases production costs for firms. An increase in the cost of production reduces aggregate supply in the economy and the short-run aggregate supply curve shifts leftward.

_____ results in cyclical unemployment in an economy.

a. Fluctuation in business cycles Feedback: Correct. Cyclical unemployment is unemployment that fluctuates with business cycles, increasing during recessions and decreasing during expansions.

Which of the following reasons justifies the argument that GDP is not a perfect measure of welfare?

a. It fails to account for externalities created during production and consumption. GDP is not a perfect measure of welfare because it does not include the value of externalities generated in production. For example, the value of nuclear weapons produced in an economy will be reflected in GDP. The chemical pollution created by this production lowers economic welfare. However, this will not be included in GDP.

Which of the following is true of the consumer price index?

a. It is a measure of inflation in an economy. Feedback: Correct. CPI is a measure of inflation based on the cost of a fixed market basket of goods and services.

Which of the following types of production is not included in the GDP of a country?

a. Production occurring in the underground economy Feedback: Correct. GDP does not include off-the-books production or production that goes unreported in order to evade taxes or because it is illegal.

Suppose government expenditure during a particular year exceeds net taxes. Which of the following conditions is most likely to be true?

a. Saving must be greater than investment. If government expenditure exceeds net tax collection, then either saving must be more than investment or imports must be higher than exports in order to maintain GDP identity.

Which of the following is true if the aggregate demand is greater than expected, for any given aggregate supply curve?

a. The actual price level is higher than the expected level in the short run, and output exceeds the potential level

Which of the following is true in the long run?

a. The equilibrium output equals the potential output and the equilibrium price level depends on the aggregate demand curve. The equilibrium output equals the potential output and the equilibrium price level depends on the aggregate demand curve in the long run.

Which of the following will be excluded in the calculation of the GDP of the U.S.?

a. The value of the coffee shipped from India to New Jersey Feedback: Correct. Net exports reflect international trade in goods and services. Foreign purchases of U.S. goods and services are counted as part of U.S. GDP, but U.S. purchases of foreign goods and services are subtracted from U.S. GDP.

Henry Williams is an engineer who used to work for a coal mine in West Virginia. He suffered major injuries a year ago and had to quit his job immediately to undergo treatment. However, he recovered fast. This allowed him to rejoin work this year. As a result of this, _____.

a. U.S. GDP for the current year will increase Feedback: Correct. An increase in labor activity increases total earnings in a country, which increases the GDP of the country.

Which of the following statements pertains to the "animal spirits" of business expectations as put forward by Keynes?

a. When businesses grow pessimistic about the economy, they invest less and thus reduce aggregate demand. Keynes argued that aggregate demand was inherently unstable, in part because investment decisions were often guided by the unpredictable "animal spirits" of business expectations. If businesses grew pessimistic about the economy, they would invest less, which would reduce aggregate demand, output, and employment.

A recession in an economy is characterized by:

a. a decrease in output, employment, and income. A recession is a period of decline in economic activity lasting more than a few months, as reflected by falling output, employment, income, and other aggregate measures.

The total spending on final goods and services in an economy during a given period is referred to as:

a. aggregate expenditure. Feedback: Correct. The total spending on final goods and services in an economy during a given period is referred to as aggregate expenditure.

A technological breakthrough with widespread practical applications that occurs in the microcomputer industry is likely to shift the:

a. aggregate supply curve rightward. A technological breakthrough with widespread practical applications that occurs in the microcomputer industry is likely to change an economy's potential output or long-run aggregate supply and shift the aggregate supply curve rightward.

The period between a trough and a subsequent peak in a business cycle is called:

a. an expansion. In a business cycle, the period between a peak and trough is a contraction, and the period between a trough and subsequent peak is an expansion.

The aggregate demand curve for an economy shows:

a. an inverse relationship between the price level in the economy and the real GDP demanded, other things constant. The aggregate demand curve reflects an inverse relationship between the price level in the economy and real GDP demanded.

Private sector research and development focuses on:

a. applied research and innovation, while government spending on research and development focuses on basic knowledge generation that will be useful in the long run.

Setting up an industry in a region that already has a number of firms in the same industry or in related industries is _____.

a. clustering Feedback: Correct. Setting up an industry in a region that already has a number of firms in the same industry or in related industries is clustering.

The natural rate of unemployment prevails in an economy when _____.

a. cyclical unemployment is zero

A decease in labor productivity will be denoted by a(n) _____, where Q is total output, K is capital, and L is labor employed.

a. decrease in Q/L Feedback: Correct. A decease in labor productivity will be denoted by a decrease in Q/L, where Q is total output, K is capital, and L is labor employed because labor productivity is the output per unit of labor.

The rules of the game do not include _____.

a. equality and efficiency The rules of the game include laws, customs, manners, conventions, and other institutional elements that determine transaction costs and affect people's incentive to undertake production and exchange. However, they do not include elements of equality in the distribution of income or resources and efficiency in the allocation of resources.

A consumption function is based on the assumption that:

a. factors other than disposable income that affect consumption are constant.

The marginal propensity to save is the:

a. fraction of a change in income that is saved. The marginal propensity to save is the fraction of a change in income that is saved. It is the change in saving divided by the change in income.

The market value of all final goods and services produced in a country during a particular period is called the:

a. gross domestic product. Feedback: Correct. The gross domestic product measures the market value of all final goods and services produced in a nation during a particular period, usually a year.

The per-worker production function will rotate upward if there is a(n):

a. improvement in the quality of capital The per-worker production function will rotate upward if there is an improvement in the quality of capital. Technological change improves the quality of capital and rotates the curve upward.

An increase in real disposable income in the United States will:

a. increase imports and decrease the value of net exports. An increase in real disposable income in the United States will increase the demand for imported goods but will have no effect on the exports of the country as exports depend on the income levels of foreign countries. An increase in the value of imports will decrease net exports, the value of exports remaining the same.

In the long run, an increase in aggregate demand will:

a. increase the price level but not change output. In the long run, an increase in aggregate demand, given a vertical long-run aggregate supply curve, will only increase the price level but not change the output level.

Economic indicators that usually predict a downturn are referred to as:

a. leading economic indicators. Feedback: Correct. Variables that predict, or lead to, a recession or recovery are known as leading economic indicators.

If a manager of a bank loses his job on account of corruption charges after serving for five years, he will:

a. not qualify for unemployment compensation benefits. If a manager of a bank loses his job on account of corruption charges after serving for five years, he will not qualify for unemployment compensation benefits. People who are fired for a just cause do not receive unemployment compensation.

The following figure shows the per-worker production function of Krpytonia. The country is currently operating at point P on PF'. An increase in the quantity of capital per worker will lead to a movement from point P to:

a. point O. Feedback: Correct. An increase in the quantity of capital per worker will increase labor productivity and lead to a movement from point P to point O along the per-worker production function, PF'.

The following figure shows the per-worker production function of Krpytonia. The country is currently operating at point P on PF'. A technological improvement will cause a movement from point P to ______.

a. point R Feedback: Correct. A technological improvement results in an improvement in the quality of capital. This results in an increase in output per worker, which, over time, translates into more output per capita and causes an upward rotation of the per-worker production function. This causes a movement from point P on PF' to point R on PF''.

During hyperinflation, _____.

a. prices rise at a rapid rate Feedback: Correct. During hyperinflation, price rise occurs at a rapid rate. So, extremely high inflation is called hyperinflation.

The simple spending multiplier is the:

a. ratio of a change in real gross domestic product to the initial change in a component of aggregate spending that brought it about.

To close a recessionary gap:

a. real wages should decrease. It is not necessary for nominal wages to decrease to close a recessionary gap. A fall in real wages, which implies price increases more than nominal wages, can also close a recessionary gap.

If consumers expect a decrease in the price level in the future, they are likely to:

a. reduce current consumption, and this will shift the current consumption function downward. If consumers expect a decrease in the price level in the future, they are likely to reduce current consumption and defer their purchasing decisions. This will shift the current consumption function downward.

If the actual output level exceeds the potential output in an economy in the short run, there will be a(n)______.

a. reduction in output and cost-push inflation in the long run In the case of actual production exceeding an economy's potential output in the short run, the short-run aggregate supply curve shifts to the left in the long run due to a rise in production costs. There is a decrease in the output level and a rise in the price level in the economy, which is cost-push inflation as it is caused by a rise in resource prices.

The figure given below shows the aggregate demand and supply curves for an economy. Suppose the economy initially faces AD0 and AS0. Cost-push inflation will cause a(n):

a. shift of the aggregate supply curve to AS1. Feedback: Correct. Cost-push inflation will cause a leftward shift of the aggregate supply curve from AS0 to AS1, leading to a rise in the price level and a decrease in the level of real gross domestic product.

In the short run, a positive relationship exists between _____, other things remaining constant.

a. the actual price level and real gross domestic product supplied Feedback: Correct. In the short run, a positive relationship exists between the actual price level and real gross domestic product supplied, other things constant.

If an economy is simultaneously in long-run and short-run equilibrium:

a. the actual price level equals the expected price level. Feedback: Correct. If an economy is simultaneously in long-run and short-run equilibrium, then it is producing its potential output level, at which actual price level equals the expected price level.

The figure given below shows the aggregate expenditure model. At point Z:

a. there is an unexpected inventory buildup. At point Z, aggregate spending is less than real gross domestic product. There is an accumulation of unsold stock of goods and an unplanned inventory buildup at this point.

Which of the following is true in the short run?

b. Firms benefit from a higher than expected price level. Feedback: Correct. As the prices of some resources are fixed in the short run, firms welcome a higher than expected price level. This ensures a higher selling price for their products and a constant cost of some resources and therefore, a higher profit margin.

Which of the following is likely to be true if the actual price level in an economy exceeds the expected price level?

b. Firms will utilize their unused production capacity and increase production beyond the potential level in the short run. Feedback: Correct. If the actual price level in an economy exceeds the expected price level in an economy, the profits per unit is higher, and firms have an incentive to utilize their unused production capacity and increase production beyond the potential level in the short run. But, this higher rate of output is not sustainable in the long run.

Which of the following is most likely to be true if the real wage earned by Sylvia has decreased?

b. Her purchasing power has decreased. Feedback: Correct. Inflation reduces the purchasing power of money. Thus, when the real wage earned by Sylvia decreases, her purchasing power also decreases.

Identify a difference between human capital and physical capital.

b. Human capital is the accumulated knowledge and skill of the labor force, while physical capital refers to the means of production used to produce goods and services.

Which of the following is true of real GDP?

b. It is the dollar value of GDP in a particular year measured in base-year prices. Real GDP is the dollar value of GDP in a particular year measured in base-year prices.

_____ is the best indicator of an economy's standard of living.

b. Real GDP per capita Feedback: Correct. The best measure of an economy's standard of living is output per capita or real GDP per capita, which is GDP divided by population.

Identify the most likely impact of an increase in the wealth of the consumers in an economy, other things remaining constant.

b. The aggregate demand curve will shift to the right. When the wealth of consumers increases, the aggregate demand in the economy also increases. This is reflected by a rightward shift of the aggregate demand curve.

Suppose the nominal GDP of a country reported a growth of 8 percent during a particular year, while the average price level increased by 8percent. Which of the following can be concluded from this information?

b. The growth in nominal GDP came entirely from inflation. Feedback: Correct. If the rate of growth in nominal GDP is equal to the rate of growth in the average price level, it can be concluded that the growth in nominal GDP occurred entirely due to inflation.

Identify an impact of a decrease in the price level on the aggregate supply curve of an economy, other things constant.

b. The quantity of real GDP supplied will decrease as reflected by a downward movement along the aggregate supply curve. The quantity of real GDP supplied varies directly with the economy's price level. Therefore, any change in the price level will be reflected by a movement along the aggregate supply curve of an economy.

Kevin Peters owns a bakery chain that procures eggs from a poultry farm at $3 per dozen. The bakery uses the eggs to make cakes, which it sells to a distributor for $8 per pound. The distributor sells the cake to a supermarket for $10 per pound, which sells it to customers for $15 per pound. Which of the following is true?

b. The supermarket added more value than the bakery. Feedback: Correct. The value added by the distributor is $2, while the value added by the supermarket is $5. Thus, the supermarket added more value than the distributor.

Which of the following items is excluded from GDP to prevent double counting?

b. The value of intermediate goods and services Sales of intermediate goods and services are excluded from GDP to avoid the problem of double counting.

Identify an impact of technological change on labor.

b. Unemployment in the short run and higher income in the long run Technological change can reduce the demand for labor and create unemployment in the short run. However, it can also create new products and job opportunities and boost production and employment in the long run. Thus, it can lead to higher income in the long run.

A severe and prolonged reduction in a nation's economic activity, as experienced by the U.S. economy during the 1930s, is called:

b. a depression. A depression is a contraction of the economy as reflected by falling output, employment, income, and other aggregate measures.

In terms of aggregate demand and aggregate supply, the Great Depression can be viewed as:

b. a leftward shift of the aggregate demand curve. In terms of aggregate demand and aggregate supply, the Great Depression can be viewed as a shift to the left of the aggregate demand curve.

A decrease in the price level will shift the:

b. aggregate expenditure line upward.

A _____ is an example of human capital.

b. college degree Feedback: Correct. A college degree is an example of human capital as it contributes to the level of knowledge and skill of a worker and is required to use other resources efficiently.

The consumption function shows the relationship between:

b. consumption and disposable income. Feedback: Correct. The consumption function shows the relationship between consumption and disposable income, all other things remaining constant.

At full employment, _____.

b. cyclical unemployment is zero Feedback: Correct. At full employment, cyclical unemployment is zero. When economists refer to full employment, they do not mean that unemployment is zero but that there is low unemployment, ranging from 4 to 6 percent.

A sustained decrease in the average price level is called:

b. deflation. Feedback: Correct. Deflation is a sustained decrease in the average price level.

A change in _____ will not shift the consumption function.

b. disposable income A change in disposable income will not shift the consumption function. It will only cause a movement along the curve.

Capital deepening leads to:

c. an increase in labor productivity and economic growth. Feedback: Correct. Capital deepening leads to an improvement in labor productivity and is a source of economic growth.

The _____ when an economy produces its potential output.

b. expected price level equals the actual price level The expected price level equals the actual price level at the potential output of an economy. So, at potential output, there are no surprises about the price level and an economy produces the maximum sustainable output, given the supply of resources, technology, and rules of the game.

Consider an economy that is in equilibrium with the government budget in deficit and with saving less than investment. According to the circular flow model of GDP, _____.

b. exports must be less than imports. Feedback: Correct. If government expenditure exceeds net taxes and investment expenditure exceeds saving, then exports must be less than imports.

If the actual price level is below the expected price level in an economy, _____.

b. firms reduce the quantity supplied, and the actual unemployment rate exceeds the natural rate Feedback: Correct. If the actual price level is below the expected price level in an economy, firms find it less profitable to increase production because the prices received by firms by selling their output are lower than expected, while production costs do not decline. So, the quantity supplied decreases and workers are laid off, which means the actual unemployment rate exceeds the natural rate.

Jennifer quit her job as a flight attendant and was out of work for four months before she found a job as a teacher. During the four months that she was out of work, she experienced _____.

b. frictional unemployment Frictional unemployment occurs because job seekers and employers need time to find each other. Thus, Jennifer experienced frictional unemployment during the four months she was looking for a suitable job.

Labor productivity in the United States has _____ since 1870.

b. grown at an average of 2.1 percent Feedback: Correct. Labor productivity in the United States has grown at an average of 2.1 percent since 1870.

The slope of the aggregate supply curve depends on:

b. how quickly the marginal cost of production rises as output expands. The slope of the aggregate supply curve depends on how quickly the marginal cost of production rises as real gross domestic product increases. If costs increase modestly as output expands, the aggregate supply curve is relatively flat. If costs increase sharply as output expands, the aggregate supply curve is relatively steep.

A technological change:

b. improves the quality of capital. Feedback: Correct. Technological change usually improves the quality of capital and is a source of increased productivity.

A downward shift of the consumption function might be caused by a(n):

b. increase in the price level. An increase in the price level will reduce the purchasing power of money holdings, causing households to consume less and save more at each income level. So, this will cause a downward shift of the consumption function.

A decrease in the rate of interest would:

b. increase the amount invested because the opportunity cost of investing would be lower.

If a country's CPI for the current year is 128 and the CPI for the previous year was 118, we can say that the price level has:

b. increased by 8.48 percent. Inflation is the percentage change in the CPI over the years. In this example, inflation = [(128 - 118)/118] × 100 = (10/118) × 100 = 8.48 percent.

The aggregate demand curve depicts a(n):

b. inverse relationship between the price level and the real gross domestic product.

The consumer price index in the base period:

b. is always 100.

The labor force participation rate is the:

b. labor force as a percentage of the adult population. The labor force participation rate is the labor force as a percentage of the adult population.

The result of an adverse supply shock is a:

b. leftward shift of both the short-run and the long-run aggregate supply curves. An adverse supply shock is an unexpected event that reduces aggregate supply, sometimes temporarily. So, the result of an adverse supply shock is a leftward shift of both the short-run and the long-run aggregate supply curves.

In the aggregate expenditure model, _____ at the point of equilibrium.

b. planned aggregate expenditure equals total income

The significance of the expected price level is that:

b. resource owners make long-term agreements based on the expected price level. The significance of the expected price level is that firms and resource owners make long-term agreements based on the expected price level. Some resource prices, such as wages, are set by long-term contracts on the basis of the expected price level.

A beneficial supply shock will shift the:

b. short-run and long-run aggregate supply curves rightward and increase the equilibrium output and decrease the price level. Feedback: Correct. A beneficial supply shock is an unexpected event that increases aggregate supply and shifts both the short-run and the long-run aggregate supply curves rightward. This results in an increase in output and a decrease in the price level.

Between 1973 and 1982, growth in labor productivity was only 0.9 percent in the United States due to:

b. stagflation. Between 1973 and 1982, growth in labor productivity was only 0.9 percent in the United States due to stagflation. A steady rise in prices coupled with a low rate of growth in output lead to stagflation that reduced the growth in labor productivity during this period.

If capital depreciation exceeds gross investment in an economy, it is likely that:

b. the capital stock of the economy will decrease, and the aggregate supply curve will shift leftward. Feedback: Correct. If capital depreciation exceeds gross investment in an economy, the capital stock of the economy will decrease, and the aggregate supply curve will shift leftward, reflecting a decrease in the long-run aggregate supply.

Human capital refers to:

b. the education and skills of workers. Feedback: Correct. Human capital refers to the education, accumulated knowledge, and skill of the labor force. As workers acquire more human capital, their productivity and income increases.

The opportunity cost of investing in capital is the:

c. market interest rate. The market interest rate is the opportunity cost of investing in capital. When the opportunity cost of borrowing is lower, more investment is undertaken, other things being equal.

The factors held constant along a given aggregate demand curve include:

b. the exchange rate between the domestic currency and foreign currencies. The factors held constant along a given aggregate demand curve include the price levels in other countries as well as the exchange rates between the domestic currency and foreign currencies.

The higher the expected rate of inflation, _____.

b. the higher is the nominal rate of interest that borrowers are willing to pay and lenders require Feedback: Correct. The higher the expected rate of inflation, the higher is the nominal rate of interest that borrowers are willing to pay and lenders require. So, borrowers and lenders base their decision on the expected inflation rate.

The macroeconomic policy followed in the U.S. economy before the Great Depression was based on:

b. the laissez-faire philosophy of Adam Smith. Before the Great Depression, macroeconomic policy was based primarily on the laissez-faire philosophy of Adam Smith. This theory emphasizes that if people are allowed to pursue their self-interest in free markets, resources would be guided as if by an "invisible hand" to produce the most efficient and most valued level of aggregate output.

The slope of the per-worker production function reflects:

b. the law of diminishing marginal returns from capital. Feedback: Correct. The slope of the per-worker production function reflects the law of diminishing marginal returns from capital. As capital per worker increases, output per worker initially increases. Beyond a certain level of capital per worker, increases in capital lead to an increase in output per work but at a decreasing rate.

As discouraged workers and others marginally attached to the labor force are not considered unemployed, _____.

b. the official unemployment rate disguises the extent of unemployment The official unemployment rate disguises the extent of unemployment because discouraged workers and others marginally attached to the labor force, such as those who face transportation problems, family problems, or other problems that keep them from looking for work are not considered unemployed. So, the official unemployment rate understates unemployment.

The aggregate supply curve shows the relationship between _____, all other things remaining the same.

b. the price level in an economy and the aggregate output produced by firms The aggregate supply curve shows the relationship between the actual price level and the real gross domestic product supplied in the short run, other things remaining constant, including the expected price level.

The short run is a period of time during which:

b. the price of some resources cannot be changed. Feedback: Correct. The short run is a period of time during which the price of some resources cannot be changed due to implicit or explicit agreements.

The unemployment rate in an economy decreases if:

b. the size of the labor force increases and the number of unemployed people remains unchanged. The unemployment rate in an economy decreases if the number of unemployed people relative to the size of the labor force decreases.

Net exports can be expressed as:

b. the value of exports minus the value of imports.

An increase in labor productivity is denoted by a(n):

b. upward movement along the per-worker production function. Feedback: Correct. Any point on the per-worker production function shows the average output per worker for each level of capital per worker. So, an increase in labor productivity will be denoted by an upward movement along the per worker production function.

Improvements in the rules of the game could lead to a(n) _____.

b. upward rotation of the per-worker production function Improvements in the rules of the game could result in more output for each level of capital per worker and cause an upward rotation of the per-worker production function.

The long-run aggregate supply curve is a(n):

b. vertical line. Feedback: Correct. The long-run aggregate supply curve of an economy is a vertical line drawn at the level of the economy's potential output.

Workers usually negotiate compensation in terms of nominal wages because:

b. wage agreements are based on expected price levels. Workers usually negotiate compensation in terms of nominal wage because wage agreements are based on expected price levels. So, they try to bargain for higher nominal wages keeping in mind the expected price levels.

In the long run, the economy will produce the potential output if:

b. wages and prices are sufficiently flexible. In the long run, the economy will produce the potential output if wages and prices are sufficiently flexible so that any expansionary or recessionary gap can be closed by changes in wages and prices.

Unemployed people are those who:

b. want jobs but cannot find one. Feedback: Correct. Unemployed people are those who want jobs but cannot find one and have looked for work at least once during the preceding four weeks.

Basic research is the search for knowledge:

b. without regard to how that knowledge will be used. Basic research is the search for knowledge without regard to how that knowledge will be used and is the first step toward technological advancement.

The sum of the marginal propensity to save and the marginal propensity to consume is:

c. 1. Feedback: Correct. The sum of the marginal propensity to save and the marginal propensity to consume is one because disposable income is either spent or saved.

Suppose the CPI of a country in the base year is 150 while that in the current year is 175. This implies that the country's annual rate of inflation in the current year is approximately:

c. 16.67 percent. Inflation is the percentage change in the price index over the years. In this example, inflation = [(175 - 150)/150] × 100 = (25/150) × 100 = 16.67.

Which of the following policies was adopted by President Reagan and Congress to increase aggregate supply in the U.S. economy in the 1980s?

c. A reduction in personal income tax rates In 1981, to provide economic incentives to increase aggregate supply, President Ronald Reagan and Congress cut personal income tax rates by an average of 23 percent to be phased in over three years.

Feedback: Correct. A worker can demand a cost-of-living adjustment clause in his labor contract so that his nominal wage increases automatically with an increase in the rate of inflation so as to protect himself from inflation.

c. A rightward shift of the aggregate demand curve Feedback: Correct. A rightward shift of the aggregate demand curve, given an aggregate supply curve, raises the general price level of goods and services and causes demand-pull inflation.

Identify one good among those mentioned below whose value would be included in the calculation of a country's GDP for a particular year.

c. A toothbrush bought by an individual Feedback: Correct. GDP includes the value of only final goods and services produced or consumed during a particular year. A toothbrush bought by an individual is a final good that is used almost immediately and is most likely to be included in the calculation of GDP.

Which of these statements best describes a flow variable?

c. An economic variable that is measured per unit of time

The aggregate expenditure function can be expressed as:

c. C + I + G + (X − M). Feedback: Correct. The aggregate expenditure function can be expressed as C + I + G + (X − M), where C is consumption spending, I is investment spending, G is government purchases, and X - M is the net exports, with X denoting exports and M denoting imports.

_____ is most likely to increase efficiency in an economy.

c. Frictional unemployment Frictional unemployment is most likely to increase efficiency in an economy as it ensures a better match between workers and jobs.

Which of the following industries is most affected by recessions?

c. Industries producing heavy machinery and durable goods A recession hits hardest those regions that produce more capital goods, such as heavy machinery, and durable goods, such as appliances, furniture, and automobiles.

Which of the following is true of full employment?

c. It implies that structural, frictional, and seasonal unemployment exist. Full employment includes structural, frictional, and seasonal unemployment but when the economy is at full employment, cyclical unemployment is zero.

Which of the following is true of stagflation?

c. It is a supply-side phenomenon. Stagflation is a supply-side and not a demand-side phenomenon. Hence, the demand-management prescriptions of Keynes were ineffective in controlling stagflation.

Which of these is the largest component of aggregate expenditure in the U.S.?

c. Personal consumption Feedback: Correct. Personal consumption expenditure is the largest component of aggregate expenditure in the U.S.

Identify an economic activity that will reduce the GDP of a country.

c. The dismissal of employees by a financial company during a recessionary setback Feedback: Correct. The decision of a company to dismiss employees will reduce the aggregate income in the economy and result in unemployment. Therefore, the GDP of the country will decrease.

_____ is equal to the slope of the consumption function.

c. The marginal propensity to consume Feedback: Correct. The marginal propensity to consume is graphically equal to the slope of the consumption function because the slope of the consumption function is the change in consumption divided by the change in income.

Identify an example of a stock variable.

c. The number of unemployed people in an economy in a particular year A stock variable is an amount measured at a particular point in time. The level of unemployment in an economy is calculated at a particular point in time and is considered a stock variable.

Which of the following holds true at the point of intersection of the aggregate demand and aggregate supply curves?

c. The quantity of real GDP demanded equals the quantity of real GDP supplied. Feedback: Correct. The aggregate demand curve intersects the aggregate supply curve to determine the equilibrium levels of price and real GDP in the economy.

_____ if nominal wages are sticky in the downward direction.

c. Unemployment may persist for long periods of time Studies indicate that nominal wages are slow to adjust to high unemployment. So, if nominal wages are sticky in the downward direction, unemployment may persist for long periods of time.

Which of the following economic activities is likely to increase GDP?

c. Using one's personal savings and bank loans for opening a new bakery shop GDP includes all goods and services that is produced during a year. Production in the preceding year or the following year is not be included in the calculation of GDP. A new bakery adds to the total production in an economy during a year, and the value of the goods it produces is most likely to be included in GDP.

An expansionary gap is the amount by which:

c. actual output in the short run exceeds an economy's potential output. An expansionary gap is the amount by which actual output in the short run exceeds an economy's potential output.

An aggregate demand curve can be derived from shifts of the:

c. aggregate expenditure line caused by changes in the price level.

The long run is the period of time during which:

c. agreements can be renegotiated based on the actual price level. Feedback: Correct. The long run is the period of time during which agreements can be renegotiated based on the actual price level. So, there are no surprises about an economy's price level in the long run.

The GDP of a country fails to reflect:

c. an improvement in network coverage provided by telecommunication companies. The gross domestic product fails to capture changes in the quality of products or in the availability of new products.

It has been observed that _____ tend to have the highest unemployment rate in the United States among workers who are 20 years of age or older.

c. black males Feedback: Correct. It has been observed that black males tend to have the highest unemployment rate in the United States among those who are 20 years of age or older.

A decrease in real income will:

c. cause a downward movement along the consumption function.

An inflation measure that adjusts the weights from year to year is called a:

c. chain-weighted system. The chain-weighted real GDP adjusts the weights more or less continuously from year to year, reducing the bias caused by a fixed-price weighting system.

The marginal propensity to consume is the:

c. change in consumption divided by the change in income. The marginal propensity to consume is the fraction of a change in income that is spent on consumption. It is the change in consumption divided by the change in income that caused it.

Structural unemployment occurs in an economy due to:

c. changes in tastes, technology, and taxes that reduce the demand for certain skills. Feedback: Correct. Structural unemployment occurs in an economy due to changes in tastes, technology, taxes, and competition that reduce the demand for certain skills and increase the demand for certain skills.

Fluctuations in the inflation rate:

c. complicate international transactions as the exchange rate varies with variations in the anticipated inflation rate. Fluctuations in the inflation rate complicate international transactions as firms buying and selling in international markets must anticipate not only the domestic rate of inflation but also changes in the value of dollar relative to foreign currencies. Inflation uncertainty and the resulting exchange-rate uncertainty complicate international transactions.

In a closed economy without a government, aggregate expenditure at each level of income is equal to _____.

c. consumption plus planned investment

A(n) _____ will shift the long-run aggregate supply curve of an economy leftward.

c. decline in the fertility of land

Suppose the price level in an economy increases by 4 percent. This will:

c. decrease consumption because the value of net wealth has decreased. Feedback: Correct. An increase in the price level in an economy by 4 percent will decrease consumption as the real value of money and assets will decline. So, households will try to save more and spend less, which will reduce aggregate consumption and shift the consumption function downward.

Other things constant, an increase in the price level in the U.S.:

c. decreases the quantity of U.S. real GDP demanded, shown by an upward movement along the aggregate demand curve. When the U.S. economy's price level increases, U.S. products become more costly compared to foreign products. This reduces the quantity of U.S. real GDP demanded.

To protect himself from inflation, a worker can:

c. demand a cost-of-living adjustment clause in his contract. Feedback: Correct. A worker can demand a cost-of-living adjustment clause in his labor contract so that his nominal wage increases automatically with an increase in the rate of inflation so as to protect himself from inflation.

A macroeconomic policy that focuses on boosting aggregate expenditure in an economy as a way of promoting full employment and price stability is referred to as:

c. demand-side economics. The Keynesian approach is referred to as demand-side economics because it focused on how changes in aggregate demand might promote full employment.

A(n) _____ is likely to shift the investment function leftward.

c. forecast of recession A forecast of recession would imply that firms would not be optimistic about their profit prospects in the future. This would reduce the demand for investment and shift the investment demand curve to the left.

The time required by job seekers and employers to explore the job market is the source of _____.

c. frictional unemployment The time required by job seekers and employers to explore the job market is the source of frictional unemployment. Frictional unemployment does not usually last long and results in a better match between workers and jobs.

The main aim of industrial policy is to:

c. give domestic industries advantage over foreign competition. Industrial policy is the idea that the government could help nurture the industries and technologies of the future to give domestic industries an advantage over foreign competitors. The government could use taxes, subsidies, and regulation to achieve this objective.

Research and development has contributed to a growth in productivity through an:

c. improvement in the quality of human and physical capital. Research and development has contributed to a growth in productivity through an improvement in the quality of human and physical capital. Human capital has benefitted from better education, health care, and job training. Better technology embodied in physical capital has also improved labor productivity.

If the aggregate expenditure in an economy increases by $5 billion, the equilibrium real gross domestic product will:

c. increase by more than $5 billion because of the multiplier effect. If the aggregate expenditure in an economy increases by $5 billion, the aggregate expenditure line will shift upward by $5 billion, and equilibrium real gross domestic product will increase by more than $5 billion because of the multiplier effect.

Cost-push inflation can be caused by a(n):

c. increase in the demand for wages by unions. Cost-push inflation is a sustained rise in the price level caused by a leftward shift of the aggregate supply curve. Union demand for higher wages increases the cost of production and reduces aggregate supply by shifting the aggregate supply curve leftward. So, it can result in cost-push inflation.

Growth in productivity is important because:

c. it improves a nation's standard of living. Feedback: Correct. Growth in productivity is important because it improves a nation's standard of living. In the long run, small improvements in productivity can make huge differences in an economy's ability to produce through the cumulative effect and, therefore, increase the standard of living.

It is generally observed that an economy's______ during a recession.

c. output is below the potential level, and its unemployment rate is above the natural rate Feedback: Correct. Output is below the potential level, and the unemployment rate is above the natural rate during recession.

Unplanned reductions in inventories imply _____.

c. people want to spend more than the amount of goods produced in an economy Feedback: Correct. Unplanned reductions in inventories imply that people want to spend more than the amount of goods produced in the economy, so firms should increase production. This increases employment and consumer income, leading to more spending.

It is generally observed that when a recessionary gap is closed in the long run, there is _____.

c. price deflation and greater output Feedback: Correct. It is generally observed that when a recessionary gap is closed in the long run, there is price deflation and greater output. When the price level is lower than expected and the unemployment rate is higher than the natural rate, firms and workers negotiate lower nominal wages. This shifts the aggregate supply curve rightward, leading to price deflation and greater output.

Productivity is defined as the:

c. ratio of total output to a specific measure of input. Feedback: Correct. Productivity is defined as the ratio of total output to a specific measure of input. Thus, productivity measures how efficiently resources are turned into goods and services.

A 4-percent increase in nominal wage and an annual inflation rate of 8 percent implies that:

c. real wage has decreased. Feedback: Correct. A 4-percent increase in nominal wage and an annual inflation rate of 8 percent implies that real wage has decreased as the rate of increase in inflation exceeds the rate of increase in nominal wage.

Unemployment benefits are likely to:

c. reduce the urgency of finding work and increase unemployment. Feedback: Correct. Unemployment benefits are likely to reduce the urgency of finding work as unemployed workers receive cash transfers from the government. This is likely to increase unemployment.

An improvement in business expectations about the economy is likely to cause a(n):

c. rightward shift of the investment demand curve. Business expectations about the economy are assumed to be constant along the investment demand curve. So, an improvement in the business expectations will increase the demand for investment and shift the investment demand curve to the right.

Applied research:

c. seeks to answer particular questions. Feedback: Correct. Applied research seeks to answer particular questions or to apply scientific discoveries to develop specific products.

An increase in the price of oil by The Organization of the Petroleum Exporting Countries (OPEC) is likely to:

c. shift the aggregate supply curve leftward and cause cost-push inflation. Feedback: Correct. An increase in the price of oil by The Organization of the Petroleum Exporting Countries (OPEC) is likely to increase the cost of production. This will shift the aggregate supply curve leftward and for a given aggregate demand curve, will raise the price level and result in cost-push inflation.

The net taxes of a government equal _____.

c. taxes minus transfers

A recessionary gap can be closed in the long run if:

c. the aggregate supply curve shifts rightward. Feedback: Correct. A recessionary gap can be closed in the long run if workers and firms negotiate lower nominal wages. In that case, the cost of production decreases, and the aggregate supply curve shifts rightward.

Macroeconomics is a branch of economics that studies:

c. the overall performance of the economy. Feedback: Correct. Macroeconomics is concerned with the overall performance of the economy.

Along the aggregate expenditure line, _____ is assumed to be constant.

c. the price level

The term "price level" used by economists refers to a composite measure that reflects:

c. the prices of all goods and services in an economy relative to prices in a base year. The term "price level" used by economists refers to a composite measure that reflects the prices of all goods and services in the economy relative to prices in a base year.

Real wage is measured in terms of:

c. the quantity of goods and services that can be bought. Real wage is the wage measured in dollars of constant purchasing power. So, it is measured in terms of the quantity of goods and services it buys.

The larger the marginal propensity to save, other things constant, _____.

c. the smaller the multiplier The simple spending multiplier is the inverse of the marginal propensity to save. So, the larger the marginal propensity to save, other things constant, the smaller the simple spending multiplier.

The gross private domestic investment component in GDP is likely to include:

c. the value of a new pizza oven purchased by Pizza Hut. Feedback: Correct. Gross private domestic investment consists of spending on new capital goods and on net additions to inventories. It includes expenditures on new equipment and machinery like pizza ovens.

The price indexes reported for 2005 and 2006 in Country X were 100 and 105, respectively. This implies that the price level in Country X:

c. was 5 percent higher in 2006 than in 2005. Feedback: Correct. The increase in the price index = (105 − 100)/100 = 5 percent.

The GDP of a small country for a particular year was $45, million and the capital depreciation from GDP was $12 million. This implies that the net domestic product of this country was:

d. $33 million. Feedback: Correct. Net domestic product = GDP - Depreciation cost = $45 million − $12 million = $33 million.

If the marginal propensity to consume equals 0.2, the multiplier is:

d. 1.25. 1/1-MPC 1/(1.-.02)=1.25

If the marginal propensity to save is 0.65, the value of the multiplier will be _____.

d. 1.53 The simple spending multiplier can be expressed as: Simple Spending Multiplier - 1/1-MPC = 1/MPS 1/.65=1.53

Consider an economy of 150 people. 70 people have jobs, 15 are looking for jobs, and 65 are retired. The labor force participation rate for this economy is _____.

d. 56.67 percent Feedback: Correct. The labor force participation rate is the labor force as a percentage of the adult population. In this case, labor force participation rate is ((70+15)/150)X100=56.67 percent.

Which of the following was prescribed by Keynes to pull an economy out of the Great Depression?

d. An expansionary fiscal policy that increases aggregate demand Feedback: Correct. Keynes proposed that the government jolt the economy out of its depression by increasing aggregate demand. He recommended an expansionary fiscal policy to help offset contractions.

Which of the following is a difference between basic and applied research?

d. Basic research yields a higher return to society than applied research. Basic research may give a lower payoff than applied research in the short run because technological breakthroughs may or may not have commercial possibilities. However, it yields a higher return to society as a whole than applied research.

An example of a flow in economic theory is:

d. Betty's income from piano classes each month. Feedback: Correct. Betty's income is a flow variable as it is measured over an interval of time.

Which of these policies were adopted by President Richard Nixon to control runaway inflation in the U.S. economy in the 1970s?

d. Ceilings on prices and wages

Which of the following can be considered a leakage from the circular flow of income?

d. Imports Feedback: Correct. Any diversion of income from the domestic spending stream is known as a leakage. It includes saving, taxes, and imports.

Which of the following is most likely to shift the aggregate supply curve to the left?

d. Increase in oil prices An increase in oil prices is likely to increase the resource cost of firms, and shift the aggregate supply curve to the left.

Which of these is a limitation of using GDP as a measure of national income?

d. It fails to reflect changes in the quality of products Feedback: Correct. The gross domestic product fails to reflect changes in the quality of products or in the availability of new products.

Which of the following is true of nominal GDP?

d. It is based on prices prevailing at the time of production. Feedback: Correct. Nominal GDP is based on prices prevailing at the time of production.

Which of the following is true of the GDP price index?

d. It measures the average price of all goods and services produced in an economy. Feedback: Correct. The GDP price index is a comprehensive inflation measure of all goods and services included in the gross domestic product.

Which of these statements best describes a business cycle?

d. It represents the rise and fall in the level of economic activity relative to the long-term growth trend of an economy. Economic fluctuations or business cycles are the rise and fall of economic activity relative to the long-term growth trend of the economy.

Which of the following is true of depreciation?

d. It represents the value of capital stock that is used up in the production process. The value of capital stock used up to produce GDP or that becomes obsolete during the year is called depreciation.

_____ during a period of rapid inflation.

d. Money loses its use as store of value Feedback: Correct. A rapid rise in the general price level makes money lose its value, and it no longer serves as a store of value.

Which of the following topics is most likely to be included in the study of macroeconomics?

d. National output Macroeconomics is concerned with the structure of economic activity in a community, a region, a country, a group of countries, or the world.

Which of these is the base period used by the federal government for the calculation of the CPI?

d. The 36 months of 1982, 1983, and 1984 Feedback: Correct. The federal government uses the 36 months of 1982, 1983, and 1984 as the base period for calculating the CPI for a market basket consisting of hundreds of goods and services.

Which of the following suggests that there has been inflation in an economy since the base year?

d. The GDP price index in the current year is greater than 100. The price index in the base year is usually 100. Hence, if the price index in the current year is more than 100, it indicates that the economy has experienced inflation.

Identify an example of a flow variable.

d. The amount of sales tax collected per year A flow variable is a measure of something over an interval of time.

Which of the following is an example of basic research?

d. The building of a model of the planetary system by a physicist in his laboratory A physicist building a model of the planetary system in his laboratory is an example of basic research. It signifies a search for knowledge without any regard to how that knowledge will be used.

Which of the following statements describes the value added in production?

d. The difference between the selling price of a product and the cost of raw materials Feedback: Correct. The value added by each firm equals that firm's selling price minus payments for inputs purchased from other firms.

Which of the following is true when an economy is in long-run equilibrium?

d. The economy's actual output equals its potential output. Feedback: Correct. When an economy is in long-run equilibrium, its actual output equals its potential output as the level of output is determined by the long-run aggregate supply curve.

The table below shows the aggregate demand and aggregate supply schedules for an economy. Based on the information given in the table, which of the following statements is true?

d. The equilibrium real GDP is $700 billion, and equilibrium price level 60. Feedback: Correct. The quantity of real GDP demanded equals the quantity of real GDP supplied at a price level of 60. Therefore, the equilibrium price level is 60 and the equilibrium real GDP is $700 billion.

Which of the following is considered as consumption expenditure in the expenditure approach to calculating GDP?

d. The spending by households on monthly groceries Feedback: Correct. In the expenditure approach to calculating the GDP for a particular year, personal consumption expenditures consist of purchases of final goods and services by households during the year.

The aggregate supply curve of an economy depicts:

d. a direct relationship between the price level and the quantity of real GDP supplied. The upward-sloping aggregate supply curve shows a positive relationship between the price level and the quantity of real GDP supplied.

The expenditure approach to GDP involves the calculation of GDP:

d. by adding up spending on all final goods and services produced during a year. Feedback: Correct. The expenditure approach to GDP involves the calculation of GDP by adding up spending on all final goods and services produced during the year.

Anticipated inflation:

d. causes fewer problems than unanticipated inflation. Anticipated inflation causes fewer problems than unanticipated inflation as the increase in the average price level is expected by producers and consumers, and they can act accordingly.

Inflation can be defined as a(n):

d. continuous rise in the general price level. Feedback: Correct. Inflation can be defined as a continuous rise in the general price level of goods and services.

An adverse supply shock is likely to:

d. decrease the equilibrium output and increase the equilibrium price level, resulting in stagflation. An adverse supply shock is likely to shift the short-run and long-run aggregate supply curves leftward. For a given aggregate demand curve, it will result in a higher equilibrium price level and a lower equilibrium output, which is also referred to as stagflation.

The income households have available to spend or to save after paying taxes and receiving transfer payments is called:

d. disposable income. Feedback: Correct. The income households have available to spend or to save after paying taxes and receiving transfer payments is called disposable income.

The figure below shows the aggregate demand and supply curves for an economy. If the economy moves from point e to e', then the:

d. economy experiences deflation. Feedback: Correct. If the economy moves from point e to e', there occurs a fall in the price level from P1 to P2, indicating price deflation.

A possible disadvantage of industrial policy is that it could:

d. evolve into a government give-away program. A possible disadvantage of industrial policy is that it could be guided by political motives and evolve into a government give-away program.

In the long run, technological change leads to:

d. higher income and more leisure. In the long run, technological change leads to more job opportunities in different sectors of an economy, though there might be loss of employment opportunities in some sectors. Thus, the long-run benefits of technological change include more leisure and higher levels of real income.

According to Nobel Prize winner Simon Kuznets, the driving force behind economic growth is a(n):

d. improvement in the quality of resources. Feedback: Correct. According to Simon Kuznets, the driving force behind economic growth is improvement in the quality of resources. He argued that changes in the quantities of labor and capital account for only one-tenth of the increase in economic growth and nine-tenths come from improvements in the quality of these inputs.

The long-term growth experienced by the U.S. economy despite economic fluctuations can be attributed to:

d. improvements in technology used in production. Feedback: Correct. The long-term growth in production was achieved because of increases in the amount and quality of resources (especially labor and capital), use of better technology, and improvements in the rules of the game that facilitate production and exchange.

Capital deepening is an:

d. increase in the amount of capital per worker. Capital deepening is an increase in the amount of capital per worker and is a source of rising productivity.

A decrease in net wealth will:

d. increase people's desire to save and shift the consumption function downward. A decrease in net wealth will increase people's desire to build up saving as a buffer against hard times. This will reduce consumption as income earned is either spent or saved. The result will be a downward shift of the consumption function.

It is assumed that the primary motive of investors is to:

d. maximize their profit. It is assumed that the primary motive of investors is to maximize their profit. They invest in the current period expecting a higher return in the future.

Investment consists of spending on _____.

d. new housing Investment consists of spending on new factories, office buildings, malls, new equipment, new housing, and net increases to inventories.

The unemployment rate is expressed as the:

d. number of unemployed people as a percentage of the labor force. Feedback: Correct. The unemployment rate is expressed as the number of unemployed people as a percentage of the labor force.

The shape of the per-worker production function indicates that:

d. output increases at a diminishing rate as the quantity of capital per worker increases. Feedback: Correct. The shape of the per-worker production function indicates that as the quantity of capital per worker increases, output per worker increases but at a diminishing rate.

If the population of a country increases, _____.

d. output per capita must increase to maintain the same standard of living The standard of living is measured by output per capita. So, if the population of a country increases, output per capita must increase to maintain the same standard of living.

The labor force of the United States consists of all the:

d. people above 16 years of age who are either working or looking for jobs. Feedback: Correct. The labor force of the U.S. consists of the civilian, noninstitutional adult population above the age of 16 years who are either working or looking for jobs.

If the rate of inflation increases from 2 percent to 3 percent, it is likely that the:

d. real wage of a worker will fall. Feedback: Correct. If the rate of inflation increases from 2 percent to 3 percent, it is likely that the real wage of a worker will fall. Real wage measures the wage in constant dollars, and it is likely to reduce, given a rise in the price level in an economy.

Data presented by the National Bureau of Economic Research on the business cycles experienced in the U.S. economy suggest that, since 1945, _____.

d. recessions have lasted for shorter time spans than expansions. Expansions in the U.S. economy have lasted for longer time periods and recessions have lasted for shorter time periods since 1945.

A decrease in the rate of interest in an economy will:

d. reduce the quantity of loanable funds supplied. A decrease in the rate of interest in an economy will reduce the quantity of loanable funds supplied as lenders find it less profitable to lend money.

Unemployment caused by changes in weather conditions is _____.

d. seasonal unemployment Feedback: Correct. Unemployment caused by seasonal changes in labor demand during a year is seasonal unemployment.

The figure given below shows the aggregate demand and supply curves for an economy. Suppose the economy initially faces AD0 and AS0. In the event of a demand-pull inflation, there will be a(n):

d. shift of the aggregate demand curve to AD1. In the event of a demand-pull inflation, there will be an increase in aggregate demand, which will be represented by a rightward shift of the aggregate demand curve from AD0 to AD1.

An economy's potential gross domestic product changes when there are changes in _____.

d. the composition of the labor force An economy's potential gross domestic product gross domestic product changes when there are changes in its long-run aggregate supply. Long-run aggregate supply can be altered through changes in the size, composition, and quality of the labor force or a change in preferences for labor versus leisure.

The Keynesian theory of boosting aggregate demand in an economy failed during the recessions of 1973-1975 and 1980 because:

d. the decline in output was compounded by high inflation. The Keynesian theory of boosting aggregate demand in an economy failed during the recessions of 1973-1975 and 1980 because the decline in output was compounded by high inflation.

In the long run, the aggregate demand curve determines ______, given the aggregate supply curve.

d. the equilibrium price level but not the equilibrium output level In the long run, the aggregate demand curve determines the equilibrium price level but not the equilibrium output level. The equilibrium output level is determined by the aggregate supply curve in the long run.

When the price level in an economy increases, other things constant, _____

d. the import of foreign goods and services increases.

The income half of the circular flow model focuses on:

d. the income generated from production. Feedback: Correct. The income half of the circular flow model focuses on the income arising from production.

The long-run aggregate supply curve in an economy depends on the:

d. the level of technology. The long-run aggregate supply curve in an economy depends on the level of technology, the supply of resources, and production incentives provided by the formal and informal institutions of the economic system.

The goal of every economy is to attain full employment because:

d. the opportunity cost of unemployment is lost production. Feedback: Correct. The goal of every economy is to attain full employment because the opportunity cost of unemployment is lost production of goods and services. If an economy succeeds in providing gainful employment to its labor force, it can accelerate its rate of economic growth over time.

An example of a stock in economic theory is:

d. the total value of the government bond held by Jess.

Workers are said to be underemployed if:

d. they are overqualified for their jobs or work fewer hours than they would prefer. Feedback: Correct. Workers are said to be underemployed if they are overqualified for their jobs or work fewer hours than they would prefer.

It has been observed that people in affluent countries may not be getting any happier over time because:

d. they may have started to become less sensitive to benefits and take luxuries for granted. It has been observed that people in affluent countries may not be getting any happier over time because they may have started to become less sensitive to benefits and take luxuries for granted. Each generation attains a higher standard of living in affluent countries and start taking for granted those luxuries that they most desired.

Labor productivity can be measured as:

d. total output divided by the hours of labor employed to produce that output. Labor productivity can be measured as total output divided by the hours of labor employed to produce that output. So, it is output per unit of labor.

The vertical distance between the aggregate expenditure line and the 45-degree line at each level of real GDP shows the _____.

d. unplanned inventory change