Practice Questions ECON test (3)

the multiplier is equal to

1 ÷ Marginal propensity to save.

Who runs the Federal Reserve of the United States?

Chair of the Federal Reserve

During which phase of the business cycle are businesses most likely to reduce their production or shut down?

Contraction

What type of unemployment occurs due to a decline in economic activity?

Cyclical Unemployment

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium,

GDP will be below potential GDP.

Which of the following is an advantage of using the CPI to measure inflation?

It is a simple and straightforward measure that is easy to understand.

Which of the following is a characteristic of the trough phase?

Low demand for goods and services

During which phase of the business cycle is there a high demand for goods and services?

Peak

What fiscal policy tools are used to shift the aggregate demand curve?

government spending and taxes

recession shifts

left

which of the following is the correct formula for the marginal propensity to consume?

1 - Marginal Propensity to Save

The money multiplier equals

1/R, where R represents the reserve ratio for all banks in the economy.

If the total population is 400 million, the labor force is 150 million, and the unemployment rate is 8%, how many people are unemployed?

12 million

If the cost of a basket of goods in the base year is $100, and the cost of the same basket of goods in the current year is $125, what is the CPI for the current year?

125

If the cost of a basket of goods in the base year is $100, and the cost of the same basket of goods in the current year is $120, what is the inflation rate?

20%

If the total population is 500 million, the labor force is 200 million, and the unemployment rate is 5%, how many people are employed?

210 million

If the labor force is 150 million, and 10 million people are unemployed, what is the unemployment rate?

6.7%

If the total population is 300 million, and 100 million people are not in the labor force, what is the labor force participation rate?

67%

What is the Consumer Price Index (CPI)?

A measure of the average level of prices of goods and services purchased by households

Which of the following is an example of frictional unemployment?

A recent college graduate is searching for their first job

The base year for the CPI is:

A year chosen as a reference point for comparison

What is the base year used to calculate the CPI?

A year chosen to serve as a reference point for comparing prices in other years

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level ofGDP will rise.

The labor force consists of:

All individuals who are willing and able to work

Which of the following would cause the CPI to increase?

An increase in the price of food

What effect can high unemployment rates have on an economy?

Decreased economic growth

What typically happens to the stock market during the contraction phase of thebusiness cycle?

It decreases

The invention of the cotton gin ushered in the Industrial Revolution and began a long periodof technological innovation. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right

How is monetary policy different from fiscal policy?

Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.

Which phase of the business cycle is characterized by a rise in inflation?

Peak

Which of the following is NOT a phase of the business cycle?

Plateau

What is the most common method of measuring the unemployment rate?

Surveying a sample of households and counting those who are unemployed

The Consumer Price Index measures:

The cost of living for a typical household

Which of the following best defines unemployment?

The number of people who are willing and able to work but are currently without a job

Which of the following is included in the basket of goods used to calculate the CPI?

The price of housing, food, and transportation

What typically happens to interest rates during the peak phase of the business cycle?

They increase

How do lower taxes affect aggregate demand?

They increase disposable income, consumption, and aggregate demand

The recession of 2007-2009 made many consumers pessimistic about their future incomes

This will shift the aggregate demand curve to the left.

If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?

This will shift the aggregate demand curve to the right

During which phase of the business cycle are interest rates typically at their lowest?

Trough

Which of the following best describes the "wealth effect"?

When the price level falls, the real value of household wealth rises

You have saved $747. Where should you go if you want to open a checking account?

a commercial bank

Because of the slope of the aggregate demand curve, we can say that

a decrease in the price level leads to a higher level of real GDP demanded.

Monetary policy is defined as the:

adjustment of interest rates to influence economic conditions.

The ________ shows the relationship between the price level and quantity of real GDP demanded.

aggregate demand curve

Long-run macroeconomic equilibrium occurs when

aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve

Which of the following will shift the aggregate demand curve to the right, ceteris paribus?

an increase in net exports

The international trade effect states that

an increase in the price level will lower net exports

Which of the following is considered a negative supply shock?

an unexpected decrease in the refining capacity for oil

The level of aggregate supply in the long run is not affected by

changes in the price level

4 components of aggregate demand

consumption, investment, government spending, net exports

An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.

decrease; a higher price level reduces consumption, investment, and net exports.

The purpose of fiscal stimulus is to shift aggregate

demand to the right

The basic aggregate demand and aggregate supply curve model helps explain

fluctuations in real GDP and the price level.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,

he long-run aggregate supply curve will shift to the right.

In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS,

inflation occurs

The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off

investment and consumption spending

If the output gap is negative, the Federal Reserve will _____ the real interest rate to _____.

lower; reduce unemployment

The short-run aggregate supply curve has a(n) ________ slope because as prices of________ rise, prices of ________ rise more slowly

positive; final goods and services; inputs

Full-employment GDP is also known as

potential GDP

If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____

raise; cool inflationary pressures

A decrease in aggregate demand results in a(n) ________ in the ________.

recession; short run

Which of the following is NOT a characteristic of the expansion phase?

reduction in production

inflation shifts

right

Which aggregate supply curve has a positive slope?

short run only

The Federal Reserve was created to

stabilize banking

A negative supply shock in the short run causes

the aggregate supply curve to shift to the left

The long-run aggregate supply curve will shift to the right if

the economy experiences technological change

When the aggregate demand curve and the short-run aggregate supply curve intersect, A) the long-run aggregate supply curve must also intersect at the same point.

the economy is in short-run macroeconomic equilibrium.

During which phase of the business cycle is the economy at its weakest?

trough