Principles of Macroeconomics Ch 9

In the trough of a recession, output and employment Blank______.

"bottom out" at their lowest levels

If nominal income rises by 10% from $100 to $110 and the price level index rises by 6% from 100 to 106 then, real income has increased to Blank______.

$103.77

According to Okun's law, if the unemployment rate in 2009 was 9.6, the natural rate of unemployment was 7.4, and the potential GDP was $8,500 billion, what was the loss of output associated with the above-natural unemployment rate?

$374 billion

If a person's nominal income is $56,000 and the price index is 103, what is that person's real income?

$54,369

What is the formula for the CPI?

(Price of the most recent market basket/price estimate of the market basket in 1982-1984) x 100

Which of the following is the formula for calculating the unemployment rate?

(unemployed/labor force) x 100%

What is true about business cycles?

**"Ups" are followed by "downs." **They are made up of alternating rises and declines. **They vary in duration and intensity.

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

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

In the short run, when prices are sticky, an unexpected decrease in total spending will cause Blank______.

***firms to cut back on production ***GDP to decline ***firms to sell fewer units of output ***unemployment to rise

What are the effects of unanticipated deflation?

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

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

**Firms will have a strong demand for labor. **Firms have an incentive to expand their plants and equipment.

Which statements about frictional and structural unemployment are true?

**Frictionally unemployed workers have marketable skills, while structurally unemployed workers do not. **Frictionally unemployed workers live in areas where jobs exist, while structurally unemployed workers do not have appropriate jobs available to them.

Which of the following explain why flexible-income receivers may be unaffected by or even benefit from unanticipated inflation?

**Their incomes may automatically increase when the CPI increases. **Demand-pull inflation may cause some nominal incomes to increase faster than inflation and lead to real income increases. **Some union workers receive COLAs in their pay when CPI increases.

A persistent 5% annual rate of inflation will double the price level in Blank______ years.

14

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

2%

If a 3% annual rate of inflation persists, how many years will it take for the price level to double?

23.3

If the CPI was 202 in 2009 and 209 in 2010, what is the rate of inflation for 2010?

3.5%

If the CPI was 208.5 in 2009, up from 200.5 in 2008, what was the rate of inflation?

3.99%

Suppose that in a particular year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 8 percent. Using Okun's law, what is the size of the GDP gap in percentage point terms?

6 percent

The formula for the rule of 70 that calculates the number of years it will take for the price level to double is Blank______.

70 divided by the annual percentage increase in the rate of inflation

If the inflation rate is 3% and the real interest rate is 5%, what is the nominal interest rate?

8%

How long do hyperinflations usually last?

A year or less

When prices are sticky in the short run, which of the following is a result of an unexpected increase in total spending?

An increase in income

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

Anticipated inflation

Why are savers are hurt by unanticipated inflation?

As prices rise, the real value of savings decreases.

Okun's law suggests that for every percentage point by which the unemployment rate exceeds the rate, a negative GDP gap of about 2% occurs.

Blank 1: actual, real, official, or cyclical Blank 2: natural or potential

Those who are working are defined as --- (one word) and those who are not working but actively seeking work are defined as --- (one word).

Blank 1: employed Blank 2: unemployed

Workers that are --- unemployed live in areas where jobs exist, and they have marketable skills.

Blank 1: frictionally

A GDP gap equals actual GDP minus --- GDP. (Enter one word in the blank)

Blank 1: potential

Real income equals nominal income divided by the ____ ____.

Blank 1: price Blank 2: index or level

The phase of the business cycle that describes a decline in total output, income, and employment is called a(n) ---.

Blank 1: recession or contraction

How does the U.S. Bureau of Labor Statistics determine the nation's unemployment rate?

By conducting a monthly, nationwide random survey of 60,000 households

In 2020, an unusual type of recession was triggered by the --- pandemic.

COVID-19

Why does the business cycle affect output and employment in capital and durable goods industries more severely than in industries producing non-durable goods?

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

True or False: When an economy experiences negative shocks, in the short run, the economy responds primarily through changes in prices.

False

True or false: Recent recessions have been more severe in intensity, but not duration, than the Great Depression of the 1930s.

False

True or false: The unemployment rate for African Americans and Hispanics is lower than that for whites.

False

Which of the following is a consequence of unexpected lower total spending in the short-run when prices are sticky?

Firms sell fewer units of output

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

Food items Energy products

What does Okun's law indicate?

For every 1% by which the actual unemployment rate exceeds the natural rate there will be a negative GDP gap of 2%.

Remy worked as a sales associate at a large retailer through the holiday season, but that position has since ended. As a result, Remy is without work while he looks for a new job. What term would economists use to refer to Remy's situation?

Frictional unemployment

The economy attains Blank______ when the unemployment rate equals the natural rate of unemployment.

Full employment

The difference between actual and potential GDP is called a Blank______ gap.

GDP

Which demographic categories are commonly used by economists when breaking down unemployment rates?

Gender Education Duration

Which of the following describe why unemployment rates are higher for African Americans and Hispanics than for whites?

Greater concentration in lower-skilled occupations Lower rates of educational attainment

Which statements about inflation are true?

Inflation is arbitrary and occurs regardless of society's values and goals. Many people are both helped and hurt by inflation.

Which of the following statements best describes the nominal interest rate?

Interest rates that are expressed in annual amounts and not adjusted for inflation

Why do economists almost universally condemn hyperinflation?

It causes businesses to stockpile materials. It has a negative effect on employment. It reduces real output.

Which statement about real income is true?

It has been adjusted for changes in prices over time.

Which statements about the CPI are true?

It is periodically updated by the BLS to reflect current inflation rates. It is updated every few years to reflect recent consumer purchasing patterns.

How is cost-push inflation unique?

It reduces the overall quantity of real output.

Which statement best describes U.S. inflation between 1982 and 2000?

It was neither very high nor very low.

If Sally's nominal income rises by 6% and the price level rises by 6% in the same period, what will happen to Sally's real income?

It will remain unchanged.

If Sally's nominal income increases by 10% and the price level increases by 6%, what will happen to Sally's real income level?

It will rise by 4%.

Why does investment decline during periods of hyperinflation?

Lenders know that the value of their loan will decline.

What happens when the actual inflation rate is higher than the expected rate of inflation?

Lenders may receive a negative real rate of return.

Which of the following are characteristics of lower-skilled workers?

Less likely to be self-employed Longer spells of structural unemployment

Which of the following are possible sources of the demand and supply shocks that can cause business cycles?

Monetary factors Financial instability Irregular innovation

Which of the following are categories by which unemployment rates are broken down?

Occupation Race and ethnicity Age

What are the results of unexpected higher total spending in the short run when prices are sticky?

Output rises Employment rises GDP rises

What are the four phases of the business cycle?

Peak Trough Recession Expansion

______ is a major factor preventing the economy from rapidly adjusting to shocks.

Price stickiness

Why are household purchases are affected by the business cycle and the negative effects of a recession?

Purchases of durable goods can be postponed.

Which of the following are reasons why teenagers have a much higher unemployment rate than adults?

Quit more frequently "Fired" more frequently Have less geographic mobility Have lower skill levels

What generally brings about an end to hyperinflation?

Reduction in government spending

What was the state of the world economy before the start of the COVID-19 pandemic?

Robust growth

Unexpected events that drive economic cycles and fluctuations are called economic --- .

Shocks

What are the results of unanticipated inflation?

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

Which of the following is a major factor in preventing the economy from rapidly adjusting to shocks?

Sticky prices

Which type of unemployment occurs as a direct result of a mismatch between skills and jobs?

Structural

Which of the following happen as a result of inflation?

Tax collections increase. The burden of the public debt is reduced.

What is the unemployment rate?

The percentage of the labor force that is unemployed

What does the Consumer Price Index (CPI) measure?

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

Why is inflation is a problem?

The purchasing power of money is reduced.

What do lenders do specifically to avoid losing money on their loans as a result of anticipated inflation?

They charge an inflation premium.

Which of the following is a reason teenagers have a higher unemployment rate than adults?

They have lower skill levels.

What is the formula for per-unit production cost?

Total input cost divided by units of output

True or false: In the United States, inflation reached double-digit rates in the 1970s and early 1980s but then it declined and remained relatively mild until the early 2020s.

True

True or false: The Bureau of Labor Statistics lists all part-time workers as fully employed.

True

True or false: Unanticipated inflation reduces the real burden of the public debt because the nominal national income and the tax collections rise with inflation; the amount of the public debt does not.

True

Which of the following are normally very similar between men and women?

Unemployment rates

What are common characteristics of less-educated workers that contribute to their having higher unemployment rates than workers with more education?

Working lower-skilled jobs Having more time between jobs Working jobs that are vulnerable to cyclical layoff

What is the formula for a GDP gap?

actual GDP minus potential GDP

Business cycles are Blank______.

alternating increases and decreases in economic activity

What makes up a business cycle?

alternating rises and declines in the level of economic activity

A lender who charges an inflation premium to a borrower is altering the redistribution of income due to Blank______.

anticipated inflation

When expected inflation is 5% and the actual inflation rate is 7%, borrowers Blank______.

are better off and lenders are worse off

The official unemployment rate may be understated because part-time workers Blank______.

are counted as employed but discouraged workers are not counted

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

are unemployed as they actively search for a new job.

Cost-of-living adjustments are Blank______.

automatic wage changes that happen when the CPI rises

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

business cycle fluctuations rather than slow, smooth growth

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

can be postponed

Services and nondurable consumer goods are somewhat insulated from the severe effects of a recession because purchases of services and nondurable goods Blank______.

cannot be postponed

The formula for the --- Price Index is the price of the most recent market basket in a particular year divided by the price estimate of the market basket in 1982-1984 multiplied by 100.

consumer

The rate of inflation is equal to the percentage change of the Blank______ from one year to the next.

consumer price index

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

consumer price index

The composition of the market basket for the CPI is based on spending patterns of urban Blank______ in a given period.

consumers

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

cost of living adjustments

What term describes inflation caused by an increase in the per-unit production costs at each level of total spending?

cost-push

The rocketing prices of imported oil in 1973-1974 and again in 1979-1980 are good illustrations of Blank______.

cost-push inflation

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

creditors savers fixed-income recipients

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

cyclical

A worker that is unemployed because of an insufficient demand for goods and services is an example of Blank______.

cyclical unemployment

Unanticipated inflation benefits debtors because Blank______.

debtors pay back loans with less valuable dollars

What term describes inflation caused by an excess of total spending beyond the economy's capacity to produce?

demand-pull inflation

What term describes a worker who, after unsuccessfully seeking employment for some time, becomes frustrated and stops actively seeking work?

discouraged

The official unemployment rate is understated because it does not count Blank______ as unemployed.

discouraged workers

The rule of 70 says that the number of years it will take for some metric to double, given its annual percentage increase, can be found by Blank______.

dividing 70 by the annual percentage increase

Economic theories are founded on the idea that economic fluctuations are driven by Blank______.

economic shocks

The labor force is the sum of the Blank______ and Blank______.

employed; unemployed

When prices are sticky in the short run, the economy is forced to respond to shocks in the economy with changes in Blank______.

employment output

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

equals the structural and frictional unemployment rate

What causes demand-pull inflation?

excess total spending

What is the long-run trend of the U.S. economy?

expansion and growth

During hyperinflation, what happens to the value of money?

falls rapidly

True or false: If the inflation rate exceeds the interest rate, the value of savings will increase.

false

When inflation occurs each dollar of income will buy Blank______ goods and services than before.

fewer

When inflation occurs, people with --- incomes see their real incomes fall.

fixed

Full employment is something less than 100 percent employment of the labor force because economists say that the economy is "fully employed" when it is experiencing only Blank______.

frictional and structural unemployment

Ramel quit his current job and has taken a new job for higher pay. The new job starts in two weeks. During the two weeks between jobs, Ramel is Blank______ unemployed.

frictionally

Which term describes workers that are unemployed because they are "between jobs"?

frictionally unemployed

The Bureau of Labor Statistics lists all part-time workers as Blank______.

fully employed

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

gap

What effects of the COVID-19 pandemic caused inflation to rise in 2021?

government stimulus checks supply chain disruptions

The long-run trend of the U.S. economy is expansion and economic

growth

On average, unemployment rates among less-educated workers are --- than workers with more education.

higher

Creditors are Blank______ by unanticipated inflation.

hurt

Unanticipated inflation _blank _ fixed-income recipients, savers, and creditors

hurts

Frictional unemployment means that many workers are voluntarily between jobs as they are moving to higher-paying, more productive positions. Which of the following are desirable results of this movement?

increase in GDP better allocation of labor resources higher income for the workers

Frictional unemployment is Blank______.

inevitable and, in part, desirable

People whose incomes are fixed see their real incomes fall when --- occurs.

inflation

What are real interest rates?

interest rates quoted in the market minus the expected inflation rate

Individuals who derive their incomes entirely from Social Security are Blank______ by inflation.

largely unaffected

Borrowers benefit from unanticipated inflation because they pay back loans with dollars that have Blank______ purchasing power than the dollars that were originally borrowed.

less

The number of persons unemployed for long periods as a percentage of the labor force is Blank______ the overall unemployment rate.

lower than

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

macroeconomics

The intensity and duration of the decline in GDP during the Great Depression was Blank______ the more recent U.S. recessions.

more severe than

Income that is received as wages and is not adjusted for inflation is called Blank______ income.

nominal

What is the formula for real income?

nominal income divided by the price index

When the expected rate of inflation is added to the real interest rate, the result is called the Blank______.

nominal interest rate

The interest rates quoted in the market are known as Blank______.

nominal interest rates

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

often change, creating temporary changes in prices

The basic economic cost of unemployment is forgone Blank______.

output

What is the denominator in the formula for calculating per-unit production costs?

output

What happens during periods of recession?

output and employment fall

What happens during an expansion period?

output rises income rises

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

peak

What is the phase of the business cycle when the economy is near or at full employment and the level of real output is at or near capacity?

peak

Real income will remain the same when nominal income rises at the same percentage rate as the Blank______.

price index

Which of the following are the most likely sources of shocks that can cause business cycles?

productivity changes monetary factors unexpected political events irregular innovation

If Samira saves $1,000 in the bank and earns 6% interest and inflation is greater than 6%, then the Blank______.

purchasing power of the savings will decline

How does the U.S. Bureau of Labor Statistics determine who is employed and unemployed?

random survey of households

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

real

Income that has been adjusted for changes in prices over time is called Blank______.

real income

Inflation may lead to the redistribution of Blank______.

real income

An expansion usually follows immediately after a Blank______ in the business cycle.

recession

Cost-push inflation can contribute to a recession by increasing prices. What effect does this have?

reduces output and leads to lower employment

The four phases of the business cycle can be illustrated by a series of alternating Blank______.

rising and declining curves

The unemployment rates for men and women are normally Blank______.

similar

An auto worker in Michigan who loses his job because the company relocated the plant to another country is an example of Blank______ unemployment.

structural

The labor force is the Blank______.

sum of the employed and unemployed

Unemployment that is caused by a decline in total spending and occurs in the recession phase of a business cycle is called --- unemployment.

sum of the frictional unemployment and structural unemployment rates

Which best describes the natural rate of unemployment?

sum of the frictional unemployment and structural unemployment rates

What is the major source of cost-push inflation?

supply shocks

What is the biggest cost associated with unanticipated inflation?

the arbitrary redistribution of income and wealth

Savers can only balance their losses due to inflation if Blank______.

the interest rate earned on savings is equal to or greater than the unexpected inflation

The unemployment rate equals the percentage of Blank______.

the labor force that is unemployed

What is nominal income?

the number of dollars received as wages, rent, interest or profits

The number of persons unemployed for long periods as a percentage of the labor force is much lower than Blank______.

the overall unemployment rate

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

the per-unit production costs at each level of spending

The rate of inflation is equal to Blank______

the percentage growth of CPI from one year to the next.

Deflation occurs when there is a decline in Blank______.

the price level

Real income will remain the same when nominal income rises at Blank______ the price index.

the same percentage rate as

It is widely accepted that the immediate cause of large cyclical changes in output and employment levels is a change in the level of Blank______.

total spending

The economy moves up and down rather than staying on a smooth growth trend line due to unexpected changes in Blank______.

total spending

A Blank______ of a recession is when output and employment "bottom out" at their lowest levels.

trough

True or false: Full employment is something less than 100 percent employment of the labor force.

true

What is a discouraged worker?

unemployed worker who no longer seeks work actively

The portion of the labor force that is not working but is willing and able to work and actively seeking work is defined as Blank______, and the portion of the labor force that is working part-time or full-time is defined as Blank______.

unemployed; employed

The unemployment rate is calculated by dividing the number of Blank______ by the Blank______ times 100.

unemployed; labor force

Forgone output is a basic economic cost of Blank______.

unemployment

Workers in lower-skilled occupations have higher Blank______ rates than workers in higher-skilled occupations.

unemployment