Macro Chapter 9

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:

$385 billion.

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

$510 billion.

Which of the following is not seen by economists as an underlying cause of business cycle fluctuations?

-Unexpected financial bubbles that eventually burst. -Supply shocks caused by major innovations. -Shocks to the money supply by the nation's central bank.

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Refer to the given information. The unemployment rate in Scoob is:

6.9 percent

Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:

7 percent

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is:

8 percent.

Okun's law:

Shows the relationship between the unemployment rate and the size of the negative GDP gap.

Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is the critic correct?

No, because real income may fall if prices increase more proportionately than the increase in nominal income.

In which of the following cases would real income rise?

Nominal income rises by 2 percent, and the price level remains unchanged.

(Consider This) Some economists believe that modest inflation, say 2-3 percent, might help reduce unemployment during recessions. What is the argument of economists who reject this idea?

Wages and other costs would rise with the inflation, keeping firms from expanding employment.

(Consider This) Which of the following best explains why unemployment rises significantly during a recession?

Wages are flexible upward but sticky downward.

(Last Word) Which of the following best describes why unemployment rates remained high well after the end of the Great Recession of 2007-2009?

Workers that were initially cyclically unemployed, like construction workers, effectively became structurally unemployed as they needed to transition to new industries to find work.!

Cyclical unemployment results from:

a deficiency of spending on goods and services.

A large negative GDP gap implies:

a high rate of unemployment.

A college graduate using the summer following graduation to search for a job would best be classified as:

a part of frictional unemployment

The phase of the business cycle in which real GDP declines is called:

a recession

The aggregate cost of unemployment can be measured by the:

amount by which potential GDP exceeds actual GDP.

Inflation initiated by increases in wages or other resource prices is labeled:

cost-push inflation

Rising per-unit production costs are most directly associated with:

cost-push inflation.

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would:

decline

Real income can be determined by:

deflating nominal income for inflation.

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:

deflation of 3.33 percent.

The phrase "too much money chasing too few goods" best describes:

demand-pull inflation

Real income is found by:

dividing nominal income by the price index (in hundredths).

As applied to the price level, the "rule of 70" indicates that the number of years required for the price level to double can be found by:

dividing the annual rate of inflation into "70."

(Consider This) If wages were more downwardly flexible, then we would expect:

fewer layoffs during recessions.

An unexpected increase in total spending will cause an increase in GDP:

if prices are sticky.

Unlike demand-pull inflation, cost-push inflation:

is self-limiting.

The annual rate of inflation can be found by subtracting:

last year's price index from this year's price index and dividing the difference by last year's price index.

A lender need not be penalized by inflation if the:

lender correctly anticipates inflation and increases the nominal interest rate accordingly.

Place the phases of the business cycle in order.

peak, recession, trough!, expansion !, peak

During a period of hyperinflation:

people tend to hold goods rather than money.

The unemployment rate is the:

percentage of the labor force that is unemployed.

Inflation means that:

prices on average are rising, although some particular prices may be falling.

A recession is defined as a period in which:

real domestic output falls.

Cost-push inflation:

reduces real output.

Unanticipated inflation:

reduces the real burden of the public debt to the Federal government.

In the United States, business cycles have occurred against a backdrop of a long-run trend of:

rising real GDP.

In 2010, Tatum's nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum's real income:

rose by approximately 3 percent.

Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon, where she anticipates that a new job will be available. We can say that Susie is faced with:

structural unemployment.

As it relates to economic growth, the term long-run trend refers to:

the long-term expansion or contraction of business activity that occurs over 50 or 100 years.

The phase of the business cycle in which real GDP is at a minimum is called:

the trough.

Cost-of-living adjustment clauses (COLAs):

tie wage increases to changes in the price level.

Official unemployment statistics:

understate unemployment because discouraged workers are not counted as unemployed.

Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is:

not in the labor force

Demand-pull inflation:

occurs when total spending in the economy is excessive.

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Refer to the given data. The amount of output being forgone by the economy is:

$24 billion.

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:

11 percent

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Refer to the given data. The size of the negative GDP gap as a percent of potential GDP for the economy is:

12 percent

Jimmer's nominal income will go up by 10 percent next year. Inflation is expected to be - 2 percent next year. By approximately how much will Jimmer's real income change next year?

12 percent

Answer the question on the basis of the following information about a hypothetical economy: Refer to the given information. The unemployment rate is:

12.5 percent

In the depth of the Great Depression, the unemployment rate in the United States was about:

25 percent

Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:

3 percent

Answer the question on the basis of the following information about a hypothetical economy: Refer to the given information. If the members of the underground economy are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by about:

5 percentage points.

Who is least likely to be hurt by unanticipated inflation?

An owner of a small business.

Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services?

Cyclical unemployment.

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?

Expansion.

(Consider This): Some economists believe that modest inflation, say 2-3 percent, might help reduce unemployment during recessions. Which of the following best explains their argument?

Higher prices will increase firm profitability, making them want to hire more workers

(Last Word) In response to the Great Recession, Congress extended the maximum period for drawing unemployment benefits from 26 to 99 weeks. While this was done to help workers financially and to help the economy by stimulating demand, it had what unintended consequence?

It prompted inefficiently long searches that kept the unemployment rate higher.

For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of:

Okun's law

What is the primary reason that changes in total spending lead to cyclical changes in output and employment?

Prices are sticky in the short run.

Cost-push inflation occurs when there is

Rising per-unit production costs.!

Which of the following would most likely move the economy into a recession in the short term?

The central bank printing less money than was anticipated.

Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in:

The level of total spending.

The unemployment rate that is consistent with full employment is known as ______.

The natural rate of unemployment.

Suppose the CPI was 110 last year and is 116 this year. Instructions: Round your answers to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is this year's rate of inflation? ________ percent. b. In contrast, suppose that the CPI was 110 last year and is 105 this year. What is this year's rate of inflation? _______ percent. c. What term do economists use to describe this second outcome? . ________

a. -5 percent ! b. 5.71 percent ! c.deflation

Assume the following data for a country: a. What is the size of the labor force? ______million. b. What is the official unemployment rate? _____ percent.

a. 500-120-140=240! b. (12/240)x100=5!

A country's annual growth rates over a 10-year period are shown in the following table. a. What was the country's trend rate of growth over this period? ______percent. b. Which set of years most clearly demonstrates an expansionary phase of the business cycle? Years _______. Which set of years best illustrates a recessionary phase of the business cycle? Years _______ through ______

a. ____! percent b.6-9 c.4-5

Suppose your nominal income rose by 6.3 percent and the price level rose by 2.8 percent in some year. a. By what percentage would your real income (approximately) increase? _____percent. b. If your nominal income rose by 3.8 percent and your real income rose by 1.3 percent in some year, what must have been the (approximate) rate of inflation? _____ percent.

a. _____ ! 3.5? b. 2.5

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated and is looking for a job:____. b. A recession causes a local factory to lay off 30 workers:_____. c. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant:_____. d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India: _______.

a. frictional b. cyclical c. structural d. structural

The United States' economy is considered to be at full employment when:

about 4-5 percent of the labor force is unemployed.

The GDP gap measures the difference between:

actual GDP and potential GDP

Most economists agree that the immediate cause of most business cycle variation is:

an unexpected change in the level of total spending.

According to the Bureau of Labor Statistics, to be officially unemployed a person must:

be in the labor force.

Inflation affects:

both the level and the distribution of income.

(Last Word) The Great Recession of 2007-2009 significantly increased:

both the rate of unemployment and the average length of time people were unemployed.

Recurring upswings and downswings in an economy's real GDP over time are called

business cycles.

Given the annual rate of inflation, the "rule of 70" allows one to:

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

Answer the question on the basis of the following information about a hypothetical economy: Refer to the given information. The rate of inflation:

cannot be determined from the data.!

In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?

capital goods

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are:

capital goods and durable consumer goods.

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Refer to the given information. If the natural rate of unemployment in Scoob is 5 percent, then:

cyclical unemployment is about 2 percent.

If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the:

cyclical unemployment rate is 4 percent.

The type of unemployment associated with recessions is called:

cyclical unemployment.

The production of durable goods varies more than the production of nondurable goods because:

durables purchases are postponable.

The labor force includes:

employed workers and persons who are officially unemployed

Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as:

employed.

The natural rate of unemployment is the:

full-employment unemployment rate.

Part-time workers who want full-time work are counted as:

fully employed and therefore the official unemployment rate may understate the level of unemployment.

Consider This) The main point of the Consider This box on clipping coins is that:

inflation imposes a "hidden tax" on those who hold money.

Most economists agree that the immediate determinant of the volume of output and employment is the:

level of total spending.

The presence of discouraged workers:

may cause the official unemployment rate to understate the true amount of unemployment.

Structural unemployment:

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

Full-employment output is also called:

potential output.

The natural rate of unemployment is:

that rate of unemployment occurring when the economy is at its potential output.

If actual GDP is less than potential GDP:

the actual unemployment rate will be higher than the natural unemployment rate.

During a severe recession, we would expect output to fall the most in:

the construction industry.

At the economy's natural rate of unemployment:

the economy achieves its potential output.

Answer the question on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Refer to the given data. If the unemployment rate in the economy fell to 6 percent, we could conclude that:

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

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result:

the official unemployment rate will remain unchanged.