Economics Test 3

78. If households consume less at each level of disposable income, they are: A. Saving more B. Saving less C. Spending more D. Working less

A. Saving more

86. The so-called wealth effect will result in households: A. Spending more and saving less B. Spending less and saving more C. Spending less and saving less D. Spending more and saving more

A. Spending more and saving less

18. Which of the following is included in the expenditures approach to GDP? A. Spending on meals by consumers at restaurants B. Expenditures on used clothing at garage sales C. Value of stocks and bonds bought by businessmen D. Government spending on welfare payments

A. Spending on meals by consumers at restaurants

11. If prices are "sticky" in the short run, then: A. The economy will respond to demand shocks primarily through changes in output and employment B. The economy will respond to demand shocks primarily through changes in prices and inflation C. Prices will adjust to equalize the quantities demanded and supplied of goods and services D. Unemployment will not change in response to a demand shock

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

72. The slope of the consumption schedule between two points on the schedule is: A. The ratio of the change in consumption to the change in disposable income between those two points B. The ratio of the change in disposable income over the change in consumption between those two points C. Equivalent to one plus the marginal propensity to save D. Equivalent to the average propensity to consume

A. The ratio of the change in consumption to the change in disposable income between those two points

67. Demand-pull inflation is usually accompanied by low unemployment and higher real output. True False

True

89. Assume there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, an additional $2 billion for every drop of the interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is: A. $10 billion B. $8 billion C. $6 billion D. $4 billion

A. $10 billion

97. If, in an economy, a $200 billion increase in consumption spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the marginal propensity to consume and the multiplier are, respectively: A. 0.8 and 5.0 B. 0.4 and 2.5 C. 0.4 and 1.67 D. 0.2 and 1.25

A. 0.8 and 5.0

80. With an MPS of 0.3, the MPC will be: A. 1 - 0.3 B. 0.3 - 1 C. 1/0.3 D. 0.3

A. 1 - 0.3

7. Which among the following countries had the highest GDP per person in 2011? A. Canada B. The U.S. C. Japan D. China

A. Canada

55. Inflation caused by a rise in the prices of inputs is referred to as: A. Cost-push inflation B. Demand-pull inflation C. Unanticipated inflation D. Hyperinflation

A. Cost-push inflation

57. If a person's nominal income increases by 5% while the price level increases by 2%, then that person's real income: A. Increases by 3% B. Increases by 5% C. Decreases by 7% D. Decreases by 2%

A. Increases by 3%

2. High rates of unemployment: A. Indicate that society is not using a large portion of the talent and skills of its people B. Are associated with higher price levels C. Always correspond to a decrease in nominal GDP D. Do not affect an economy's output of goods and services

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

53. Unemployment rates for skilled workers compared to unemployment rates for unskilled workers are: A. Lower, because skilled workers tend to be employed in less cyclically vulnerable industries, such as the services and nondurable goods industries B. Higher, because skilled workers tend to be employed in more cyclically vulnerable industries, such as the durable goods industry C. Higher, because businesses are less likely to retain the more costly skilled workers no matter what type of industry D. Lower, because skilled workers tend to be primarily employed by government at the local, state, and Federal levels

A. Lower, because skilled workers tend to be employed in less cyclically vulnerable industries, such as the services and nondurable goods industries

61. With mild demand-pull inflation, the economy's output level would tend to be: A. Pulled up by the increase in total spending B. Pulled down by the decrease in total spending C. Pulled up by the rising unemployment D. Pulled down by the rising unemployment

A. Pulled up by the increase in total spending

27. Personal income (PI) refers to all income: A. Received B. Earned C. Earned but not received D. Received but not earned

A. Received

6. For many decades prior to the Industrial Revolution, the standards of living in England and China: A. Remained roughly constant B. Increased steadily C. Declined substantially D. Increased many times over

A. Remained roughly constant

96. In a closed private economy, income is $50 billion and consumption is $40 billion. When income rises by 10 percent, consumption rises by 9 percent. The MPS over the relevant income range is: A. 0.11 and the multiplier is 9.09 B. 0.28 and the multiplier is 3.57 C. 0.62 and the multiplier is 1.61 D. 0.72 and the multiplier is 3.57

B. 0.28 and the multiplier is 3.57

31. In an economy, the total expenditures for a market basket of goods in year 1 (the base year) was $5,000 billion. In year 2, the total expenditure for the same market basket of goods was $5,500 billion. What was the GDP price index for the economy in year 2? A. 100 B. 110 C. 115 D. 120

B. 110

54. If the Consumer Price Index was 170 in one year and 180 in the next year, then the rate of inflation is approximately: A. 5.5 percent B. 5.9 percent C. 6.3 percent D. 7.2 percent

B. 5.9 percent

70. As disposable income decreases, consumption: A. And saving both increase B. And saving both decrease C. Increases and saving decreases D. Decreases and saving increases

B. And saving both decrease

46. In calculating the unemployment rate, part-time workers are: A. Counted as unemployed because they are not working full-time B. Counted as employed because they are receiving payment for work C. Used to determine the size of the labor force, but not the unemployment rate D. Treated the same as "discouraged" workers who are not actively seeking employment

B. Counted as employed because they are receiving payment for work

48. A headline states: "Real GDP falls again as the economy slumps." This condition is most likely to produce what type of unemployment? A. Structural B. Cyclical C. Frictional D. Natural

B. Cyclical

68. The amount of consumption in an economy correlates: A. Inversely with the level of disposable income B. Directly with the level of disposable income C. Directly with the level of saving D. Directly with the rate of interest

B. Directly with the level of disposable income

22. In the expenditures approach of national income accounting, C, Ig, and G include expenditures for: A. Domestically produced goods and services only B. Domestically produced as well as imported goods and services C. Exported goods and services D. The private sector of the economy only

B. Domestically produced as well as imported goods and services

5. The Industrial Revolution began in: A. The U.S. in the mid-1900's B. England in the late 1700's C. The Roman Empire around 500 B.C. D. China in A.D. 1800

B. England in the late 1700's

50. The rate of unemployment when the economy is at its potential output is called the: A. Full-employment rate of unemployment B. Natural rate of unemployment C. Structural rate of unemployment D. Frictional rate of unemployment

B. Natural rate of unemployment

17. The sale of a used automobile would not be included in GDP of the current year because it is a: A. Nonmarket transaction B. Nonproduction transaction C. Purely financial transaction D. Private transfer payment

B. Nonproduction transaction

19. The largest expenditure component of GDP is: A. Government purchases B. Personal consumption expenditures C. Gross private domestic investment D. Net exports

B. Personal consumption expenditures

41. Which phase of the business cycle would be most closely associated with an economic contraction? A. Peak B. Recession C. Trough D. Recovery

B. Recession

13. Between 2007 and 2009, the unemployment rate in the U.S.: A. Fell from 6% to 4.5% B. Rose from 4.7% to 10% C. Rose slightly from 5.5% to 7% D. Remained stagnant at about 7%

B. Rose from 4.7% to 10%

8. At the core of understanding economic growth is the idea that to raise living standards over time, an economy must: A. Produce and consume goods and services B. Save and invest C. Export and import D. Employ resources and earn incomes

B. Save and invest

75. If a family's MPC is 0.7, it means that the family is: A. Operating at the break-even point B. Spending seven-tenths of any increment to its income C. Necessarily dissaving D. Spending 70 percent of its disposable income

B. Spending seven-tenths of any increment to its income

51. The one quirk that labor markets have, which helps explain why unemployment goes up so much in a recession is that: A. A price floor called a "minimum wage law" exists for the labor market B. Wages are flexible upward but "sticky" downward C. Firms are "demanders" of labor, rather than suppliers D. Machines could "replace" humans in the labor market

B. Wages are flexible upward but "sticky" downward

14. The so-called Great Recession in the U.S.: A. Is another name for the Great Depression B. Was the worst economic downturn since the Great Depression C. Was triggered by oil-supply shocks D. Was caused by a sharp increase in the value of the U.S. dollar

B. Was the worst economic downturn since the Great Depression

59. A worker would be hurt least by inflation when the: A. Worker anticipates inflation and increases savings at the bank B. Worker is protected by a cost-of-living adjustment clause in an employment contract C. Worker is protected by fixed annual increases in wages and benefits in an employment contract D. Government increases the level of social security retirement benefits to correct for the effects of anticipated inflation

B. Worker is protected by a cost-of-living adjustment clause in an employment contract

45. Which of the following is the correct way to calculate the unemployment rate? A. [(unemployed)/(population)] 100 B. [(unemployed)/(labor force)] 100 C. [(labor force)/(population)] 100 D. [(labor force)/(unemployed)] 100

B. [(unemployed)/(labor force)] 100

23. The following are national income account data for a hypothetical economy in billions of dollars: gross private domestic investment ($320); imports ($35); exports ($22); personal consumption expenditures ($2,460); and, government purchases ($470). What is GDP in this economy? A. $3,250 billion B. $3,263 billion C. $3,237 billion D. $3,290 billion

C. $3,237 billion

43. What has been the range of the decline in real output during recessions in the U.S. between 1950 and 2009? A. -0.2 percent to -3.7 percent B. -5.1 percent to -9.8 percent C. -10.4 percent to -14.6 percent D. -15.0 percent to -19.9 percent

C. -10.4 percent to -14.6 percent

56. If you knew that the per-unit production cost was $8 and that the total cost of inputs was $1,000, then the number of units of output would be: A. 75 B. 100 C. 125 D. 150

C. 125

3. Which of the following is most likely to be an indication of higher unemployment? A. An increase in real GDP B. An increase in nominal GDP C. A decrease in real GDP D. A decrease in nominal GDP

C. A decrease in real GDP

44. In which industry or sector of the economy is output least likely to be affected by the business cycle? A. Housing construction B. Automobile production C. Agricultural commodities D. Capital goods production

C. Agricultural commodities

85. Which of the following would shift the consumption schedule downward? A. A decrease in real interest rates B. An increase in the value of financial assets C. An increase in the probability of a recession D. A decrease in disposable income

C. An increase in the probability of a recession

10. There is a trade-off between: A. Saving and investment B. Current production and future consumption C. Current consumption and future consumption D. Consumption and spending

C. Current consumption and future consumption

69. The consumption schedule shows the relationship of household consumption to the level of: A. Saving B. Investment C. Disposable income D. The marginal propensity to consume

C. Disposable income

58. Which of the following groups has traditionally benefited from unanticipated inflation? A. Consumers B. Business firms C. Federal government D. Foreign sector

C. Federal government

20. Gross domestic private investment, as defined in national income accounts, would include the following, except: A. Changes to business inventories B. All domestic construction done by the private sector C. Government construction of new highways and dams D. The value of all capital goods bought by business firms

C. Government construction of new highways and dams

4. Macroeconomic models help clarify important questions such as the following, except: A. Can governments reduce the severity of their economies' recessions? B. Is a policy of manipulating interest rates more effective at mitigating short-run economic fluctuations than a policy of changing the tax rates? C. How will OPEC manipulate and maintain the price of crude oil in the world markets? D. Is there a trade-off between lower unemployment and lower inflation?

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

42. A peak in the business cycle: A. Occurs when the unemployment rate is its greatest B. Occurs when the inflation rate is its lowest C. Is a temporary maximum point D. Is a temporary minimum point

C. Is a temporary maximum point

47. The best example of a "frictionally unemployed" worker is one who: A. Reduces productivity by causing friction in a business B. Is laid off during a recessionary period in the economy C. Is in the process of voluntarily switching jobs D. Is discouraged and not actively seeking work

C. Is in the process of voluntarily switching jobs

76. If the consumption schedule is a straight line, it can be concluded that the: A. APC is necessarily constant B. MPC is zero C. MPC is constant at various levels of income D. APC is equal to the MPC

C. MPC is constant at various levels of income

21. In an economy that has stationary production capacity: A. GDP is zero B. Capital consumption (or depreciation) is zero C. Net investment is zero D. Gross investment is zero

C. Net investment is zero

30. If the price index in year A is 130, this means that: A. Prices in year A are on average 130 percent higher than in the base year B. Prices in year A are on average13 times that in the base year C. Prices in year A are on average 30 percent higher than in the base year D. Nominal GDP is 130 percent higher than real GDP in year A

C. Prices in year A are on average 30 percent higher than in the base year

33. Nominal GDP differs from real GDP because: A. Nominal GDP is based on constant prices B. Real GDP is based on current prices C. Real GDP results from adjusting for changes in the price level D. Nominal GDP results from adjusting for changes in the price level

C. Real GDP results from adjusting for changes in the price level

60. Which statement about inflation is correct? A. Families are always hurt by inflation B. Inflation "subsidizes" those who receive relatively fixed money income C. The redistributive effects of inflation are arbitrary with respect to people and groups in society D. Inflation will decrease the real value of property assets and increase the real value of fixed-value assets

C. The redistributive effects of inflation are arbitrary with respect to people and groups in society

16. Which of the following is a primary use for national income accounts? A. To analyze the environmental cost of economic growth B. To assess the economic efficiency of specific industries in the economy C. To measure changes in the value of production and income in the economy D. To determine whether there is a fair and equitable distribution of income in the economy

C. To measure changes in the value of production and income in the economy

77. What is the slope of the consumption schedule or consumption line for a given economy? A. APC B. APS C. 1 - MPC D. 1 - MPS

D. 1 - MPS

95. If the MPC is 0.75, the multiplier will be: A. 2 B. 3 C. 3.5 D. 4

D. 4

1. The period when output and living standards decline is referred to as: A. Inflation B. Economic decline C. An inventory downturn D. A recession

D. A recession

73. The fraction, or percentage, of total income which is consumed is called the: A. Break-even income B. Consumption schedule C. Marginal propensity to consume D. Average propensity to consume

D. Average propensity to consume

99. Which statement about the multiplier is correct? A. If a $20 billion increase in spending creates $20 billion of new income in the first round of the multiplier process and $15 billion in the second round, the multiplier in the economy is 5 B. If a $40 billion increase in spending creates $40 billion of new income in the first round of the multiplier process and $20 billion in the second round, the multiplier in the economy is 4 C. If a $60 billion increase in spending creates $60 billion of new income in the first round of the multiplier process and $50 billion in the second round, the multiplier in the economy is 5 D. If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4

D. If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4

52. The rate of unemployment tends to be lowest for: A. Black teenagers B. White teenagers C. Black adult males D. White adult males

D. White adult males

49. "Full employment" refers to the situation when there is: A. 100% employment of the labor force B. 0% unemployment rate C. No frictional or structural unemployment D. No cyclical unemployment

D. No cyclical unemployment

87. One factor that shifts the consumption schedule is household wealth. Households build wealth by: A. Spending their current incomes B. Spending out of their future incomes C. Spending their incomes as they earn them D. Not spending all their current incomes

D. Not spending all their current incomes

94. The following factors help explain the instability of investment, except: A. Business expectations can quickly change for unpredictable reasons B. Innovations in the economy occur quite irregularly C. Profits of firms are highly variable from one period to the next D. Purchases of capital goods are usually nondiscretionary and cannot be postponed

D. Purchases of capital goods are usually nondiscretionary and cannot be postponed

9. Investment happens when: A. Current income is greater than current spending B. Current consumption is greater than current output C. Resources are devoted toward increasing current output D. Resources are devoted toward increasing future output

D. Resources are devoted toward increasing future output

74. If disposable income is $900 billion when the average propensity to consume is 0.9, it can be concluded that: A. The marginal propensity to consume is also 0.9 B. The marginal propensity to save is 0.1 C. Consumption is $900 billion D. Saving is $90 billion

D. Saving is $90 billion

36. GDP understates the amount of economic production in the United States because it excludes: A. Spending for the U.S. military B. Transfer payments C. Purchases of stocks and bonds D. Work performed by people for their own benefit

D. Work performed by people for their own benefit

15. Real GDP is calculated using current prices of outputs. True False

FALSE

37. Government purchases are the largest component of aggregate expenditures in the United States. True False

FALSE

40. All activities included in GDP serve to enrich society. True False

FALSE

101. The marginal propensity to consume is the ratio of consumption to saving. True False

False

103. If the real rate of interest increases, then the level of investment in the economy will also increase. True False

False

105. The lower the marginal propensity to consume, the larger is the multiplier. True False

False

62. A recession is defined as a situation where the average price level in the economy is increasing. True False

False

63. Unemployment that is the result of deregulation, corporate downsizing, and the closure of military bases is best categorized as frictional unemployment. True False

False

64. Official unemployment statistics overstate unemployment because discouraged workers who are not actively seeking work are counted as unemployed. True False

False

65. Inflation means that the prices of all items in the economy are increasing. True False

False

66. Unanticipated inflation benefits creditors and savers. True False

False

38. Net exports are positive when exports are greater than imports. True False

TRUE

39. Disposable income (DI) includes transfer payments like Social Security benefits and unemployment benefits. True False

TRUE

100. The average propensity to save is equal to the percentage of total income that is saved. True False

True

102. The Great Recession of 2007-2009 caused a basic change in consumer behavior, shifting the saving schedule up. True False

True

104. A business firm will purchase additional capital goods if the real rate of interest in the economy is less than the expected rate of return from the investment. True False

True