Chapter 10 Econ
In Macroland, a country that operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real GDP in Macroland? A. $9.6 trillion B. $9.8 trillion C. $10 trillion D. $10.2 trillion
A. $9.6 trillion
In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then real GDP must be: A. $98 trillion. B. $99 trillion. C. $101 trillion. D. $102 trillion.
A. $98 trillion.
If the natural rate of unemployment equals 6 percent and the actual rate of unemployment equals 5 percent, then cyclical unemployment equals: A. -1 percent. B. 1 percent. C. 3 percent. D. 11 percent.
A. -1 percent.
According to Okun's Law, when cyclical unemployment increases from 1 to 2 percent, the recessionary gap increases from ______ percent. A. -2 to -4 B. -1 to -2 C. 2 to 4 D. 1 to 2
A. -2 to -4
Since 1925, the longest expansion in the United States lasted: A. 10 years. B. 24 months. C. 43 months. D. 5 years.
A. 10 years.
The longest and most severe recession in the United States since 1925 began in _____. A. 1929 B. 1945 C. 1957 D. 1982
A. 1929
The longest expansion of the United States economy since 1925 began in _____. A. 1991 B. 1945 C. 1961 D. 1982
A. 1991
An informal definition of a recession is at least ______ consecutive quarters of declining real GDP. A. 2 B. 4 C. 6 D. 8
A. 2
Which of the following is most likely to occur in the labor market during a recession? A. The growth rate of real wages declines. B. Bonuses and promotions become more frequent. C. New entrants to the labor market have an easier time finding jobs. D. The supply of labor increases dramatically.
A. The growth rate of real wages declines.
A depression is: A. a particularly severe and protracted recession. B. the high point of economic activity prior to a downturn. C. the low point of economic activity prior to a recovery. D. a particularly strong and protracted expansion.
A. a particularly severe and protracted recession.
Industrial production, total sales, nonfarm employment, and after-tax household income are examples of ______ indicators of economic activity. A. coincident B. preceding C. lagged D. real
A. coincident
Which of the following workers is most likely to lose his/her job during a recession? A. construction worker B. baker C. farmer D. barber
A. construction worker
The aging of the labor force in the U.S. is likely to ______ the natural rate of unemployment; an increase in the efficiency of the labor market is likely to ______ the natural rate of unemployment. A. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase
A. decrease; decrease
All of the following are characteristics of short-term economic fluctuations EXCEPT: A. expansions and recessions are felt in only a few sectors of the economy. B. expansions and recessions are irregular in length and severity. C. unemployment rises during recessions. D. durable-goods industries are more sensitive to short-term fluctuations than service and non-durable industries.
A. expansions and recessions are felt in only a few sectors of the economy.
If actual output equals potential output, but potential is growing unusually slowly, then an economy: A. is in a recession. B. is in an expansion. C. has an output gap. D. has a recessionary gap.
A. is in a recession.
According to Okun's Law, when cyclical unemployment is negative, then the output gap: A. is positive. B. is negative. C. equals zero. D. equals the rate of cyclical unemployment.
A. is positive.
In a recession, the cyclical rate of unemployment: A. is rising. B. is constant. C. is falling. D. equals the natural rate of unemployment.
A. is rising.
Varying the quantity of output produced and sold at preset prices is called: A. meeting demand. B. self-correcting economics. C. Okun's law. D. spurring inflation.
A. meeting demand.
If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services: A. output gaps would not exist. B. output gaps would be positive more often than they would be negative. C. cyclical unemployment would be positive. D. potential GDP would rise much more quickly.
A. output gaps would not exist.
The duration of a recession is from: A. peak to trough. B. trough to peak. C. peak to peak. D. trough to trough.
A. peak to trough.
An expansion occurs when either ______ or _______, or both. A. potential output grows rapidly; actual output rises above potential output B. potential output grows slowly; actual output rises above potential output C. potential output grows rapidly; actual output equals potential output D. potential output grows rapidly; actual output falls below potential output
A. potential output grows rapidly; actual output rises above potential output
A recession occurs when either ______ or _______, or both. A. potential output grows slowly; actual output falls below potential output B. potential output grows slowly; actual output rises above potential output C. potential output grows rapidly; actual output equals potential output D. potential output grows rapidly; actual output falls below potential output
A. potential output grows slowly; actual output falls below potential output
If real GDP is less than potential GDP, then: A. the actual unemployment rate is greater than the natural unemployment rate. B. the actual unemployment rate equals zero. C. the output gap is positive. D. the actual unemployment rate is less than the natural unemployment rate.
A. the actual unemployment rate is greater than the natural unemployment rate.
Two possible explanations for the decline in the natural rate of unemployment in the United States over the past twenty years are: A. the changing age structure of the population and more efficient labor markets. B. advances in computer technology and globalization. C. increasing wage inequality and skill-biased technological change. D. greater quantities of human capital and increased average labor productivity.
A. the changing age structure of the population and more efficient labor markets.
The changing age structure of the U.S. population and more efficient labor markets are both possible explanations for: A. the decline in the natural rate of unemployment. B. the increase in the cyclical rate of unemployment. C. the 2001 recession. D. the stagnation of real wages.
A. the decline in the natural rate of unemployment.
The end of a recession is called the: A. trough. B. expansion. C. peak. D. boom.
A. trough.
In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then the output gap equals: A. -1 percent. B. -2 percent. C. 1 percent. D. 2 percent.
B. -2 percent.
The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $520 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha? A. 1 percent B. 3 percent C. 4 percent D. 7 percent
B. 3 percent
If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential? A. 3 percent B. 5 percent C. 6 percent D. 8 percent
B. 5 percent
In Okunland, a country that operates according to Okun's law, real GDP equals $7,520 billion, potential GDP equals $8,000 billion, and the actual unemployment rate is 8 percent. What is the natural rate of unemployment in Okunland? A. 2 percent B. 5 percent C. 6 percent D. 11 percent
B. 5 percent
The economy of Omega operates according to Okun's law. In Omega, potential GDP and real GDP equal $7 trillion, and the natural rate of unemployment equals 6 percent. What is the actual rate of unemployment in Omega? A. 4.2 percent B. 6.0 percent C. 7.0 percent D. 13.0 percent
B. 6.0 percent
If the natural rate of unemployment is 6 percent, what is the actual rate of unemployment if output is 2 percent below potential? A. 2 percent B. 7 percent C. 8 percent D. 10 percent
B. 7 percent
The increase in unemployment during a recession is associated with which type of unemployment? A. Frictional unemployment B. Cyclical unemployment C. Structural unemployment D. Nominal unemployment
B. Cyclical unemployment
An expansion is: A. a period in which the economy is growing at a rate significantly below normal. B. a period in which the economy is growing at a rate significantly above normal. C. the high point of economic activity prior to a downturn. D. the low point of economic activity prior to a recovery.
B. a period in which the economy is growing at a rate significantly above normal.
Contrary to the behavior that would be required to eliminate output gaps, many firms in the economy: A. intentionally set prices below equilibrium prices in order to create shortages. B. adjust their prices only periodically. C. have fully-flexible prices that change constantly. D. only change the amount of output they produce in the long run, not in the short run.
B. adjust their prices only periodically.
A period in which the economy is growing at a rate significantly above normal is called a(n): A. depression. B. expansion. C. peak. D. recession.
B. expansion.
Recessions tend to be ______ by ______ in the rate of inflation. A. followed; an increase B. followed; a decline C. preceded; a decline D. preceded immediately; a stabilization
B. followed; a decline
Compared to older workers, younger workers change jobs more frequently, so they are more prone to ______ unemployment and have fewer skills, so they are more prone to ______ unemployment. A. cyclical; frictional B. frictional; structural C. structural; frictional D. frictional; cyclical
B. frictional; structural
The increasing availability of temporary job placement agencies and online job services has ______ the efficiency of matching workers and jobs and ______ the natural rate of unemployment in the United States. A. increased; increased B. increased; reduced C. had no impact on; reduced D. decreased; increased
B. increased; reduced
According to Okun's Law, when cyclical unemployment increases by one percentage point, the recessionary gap ______ by ______ percentage point(s). A. increases; one B. increases; two C. decreases; one D. decreases; two
B. increases; two
Recessionary gaps are: A. efficient. B. inefficient. C. periods when actual output exceeds potential output. D. the result a decrease in the growth rate of potential output.
B. inefficient.
According to Okun's Law, when cyclical unemployment is positive, then the output gap: A. is positive. B. is negative. C. equals zero. D. equals the rate of cyclical unemployment.
B. is negative.
Workers in durable-goods industries are ______ workers in service industries to lose their jobs during a recession. A. much less likely than B. more likely than C. less likely than D. equally likely as
B. more likely than
Economic activity moves from a period of expansion to a ______ and then moves into a period of ______ until it reaches a _____. A. peak; expansion; trough B. peak, recession; trough C. trough; expansion; peak D. trough; recession; peak
B. peak, recession; trough
If the actual rate of unemployment equals the natural rate of unemployment, then: A. potential output is greater than real GDP. B. potential output equals real GDP. C. potential output is less than real GDP. D. there is a recessionary gap.
B. potential output equals real GDP.
Typically unemployment ______ during a recession and ______ during an expansion. A. rises; rises even more B. rises; falls C. rises; does not change D. falls; rises
B. rises; falls
Changes in the growth rate of potential output and deviations of actual output from potential output are two logical explanations for: A. the decline in the natural rate of unemployment. B. short-term economic fluctuations. C. increasing wage inequality. D. skill-biased technological change.
B. short-term economic fluctuations.
In the United States since 1929 the duration of recessions on average has been: A. longer than the duration of expansions. B. shorter than the duration of expansions. C. about the same duration as expansions. D. shorter than the duration of expansions before World War II, but longer afterwards.
B. shorter than the duration of expansions.
If actual GDP equals potential GDP, then: A. the actual unemployment rate is greater than the natural rate of unemployment. B. the actual unemployment rate equals the natural rate of unemployment. C. the actual unemployment rate is less than the natural rate of unemployment. D. there is a recessionary gap.
B. the actual unemployment rate equals the natural rate of unemployment.
If potential output equals $8 billion and actual output equals $7 billion, then this economy has a(n): A. budget deficit. B. trade deficit. C. expansionary gap. D. recessionary gap.
D. recessionary gap.
In reference to short-term economic fluctuations, the "peak" refers to: A. a period in which the economy is growing at a rate significantly above normal. B. the high point of economic activity prior to a downturn. C. the low point of economic activity prior to a recovery. D. a particularly strong and protracted expansion.
B. the high point of economic activity prior to a downturn.
If the output gap equals -3.2 percent, then A. cyclical unemployment equals the sum of structural and frictional unemployment. B. there is a recessionary gap. C. there is no cyclical unemployment. D. potential GDP is greater than actual GDP.
B. there is a recessionary gap.
If the output gap equals 1.8 percent, then A. cyclical unemployment equals the sum of structural and frictional unemployment. B. there is an expansionary gap. C. there is no cyclical unemployment. D. potential GDP is less than actual GDP.
B. there is an expansionary gap.
The duration of an expansion is from: A. peak to trough. B. trough to peak. C. peak to peak. D. trough to trough.
B. trough to peak.
For policymakers the problem with a recessionary gap is ______ and the problem with an expansionary gap is _____. A. a tendency for inflation to develop; wasted resources B. wasted resources; a tendency for inflation to develop C. an increase in cyclical unemployment; an increase in structural unemployment D. an increase in structural unemployment; an increase in cyclical unemployment
B. wasted resources; a tendency for inflation to develop
The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and potential GDP equals $10 trillion. What is real GDP in Omega? A. $9.0 trillion B. $9.5 trillion C. $10.0 trillion D. $10.5 trillion
C. $10.0 trillion
The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and real GDP equals $10 trillion. What is potential GDP in Omega? A. $9.0 trillion B. $9.5 trillion C. $10.0 trillion D. $10.5 trillion
C. $10.0 trillion
If the natural rate of unemployment equals 5 percent and the actual rate of unemployment equals 6 percent, then cyclical unemployment equals: A. 11 percent B. 3 percent C. 1 percent D. 0.3 percent
C. 1 percent
If potential output equals $8 billion and actual output equals $10 billion, then this economy has an output gap equal to: A. $2 billion. B. 20 percent. C. 25 percent. D. -25 percent.
C. 25 percent.
If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent above potential? A. 0 percent B. 2 percent C. 3 percent D. 6 percent
C. 3 percent
Since 1925, the longest recession in the United States lasted: A. 10 years. B. 24 months. C. 43 months. D. 5 years.
C. 43 months.
The dates of the "official" peaks and troughs of business cycles in the United States are determined by the: A. Federal Reserve. B. Congressional Budget Office. C. National Bureau of Economic Research. D. Council of Economic Advisers.
C. National Bureau of Economic Research.
Recessions begin at ______ and end at _____. A. the highest unemployment rate; the lowest unemployment rate B. the lowest unemployment rate; the highest unemployment rate C. a peak; a trough D. the highest inflation rate; the lowest inflation rate
C. a peak; a trough
The cyclical unemployment rate is zero when: A. there is not a recessionary gap. B. there is not an expansionary gap. C. actual GDP and potential GDP are equal. D. frictional unemployment equals structural unemployment.
C. actual GDP and potential GDP are equal.
A country's actual output ______ potential output. A. can never exceed B. can never be below C. can temporarily exceed D. will always be approximately equal to
C. can temporarily exceed
According to Okun's Law, each extra percentage point of ______ unemployment is associated with a ______ percentage point increase in the output gap. A. frictional; 2 B. frictional; 4 C. cyclical; 2 D. cyclical; 4
C. cyclical; 2
Economic activity moves from a trough into a period of ______ until it reaches a ______ and then into a period of _______. A. expansion; trough; recession B. recession; trough; expansion C. expansion; peak; recession D. recession; peak; expansion
C. expansion; peak; recession
If potential output equals $8 billion and actual output equals $9 billion, then this economy has a(n): A. budget deficit. B. trade deficit. C. expansionary gap. D. recessionary gap.
C. expansionary gap.
When actual output is greater than potential output there is a(n): A. budget deficit. B. budget surplus. C. expansionary gap. D. recessionary gap.
C. expansionary gap.
According to the Congressional Budget Office, over the past twenty years, the natural rate of unemployment in the United States has: A. increased. B. remained constant. C. fallen. D. fallen to zero, and is now becoming negative.
C. fallen.
"Smart" vending machines, which adjust prices automatically according to changes in demand factors (like time of day or outside temperature), are examples of: A. meeting demand at preset prices. B. skill-biased technological change. C. flexible price setting. D. capital equipment that is less expensive than standard equipment.
C. flexible price setting.
The unemployment rate for younger workers is usually ______ the unemployment rate for older workers. A. less than B. approximately equal to C. greater than D. more predictable than
C. greater than
Falling growth rates during the 2007-2009 recession occurred: A. only in the high-tech sectors of the U.S. economy. B. only in the United States. C. in the United States, Canada, Germany, the United Kingdom and Japan. D. in the United States and Canada, but not in Germany, the United Kingdom or Japan.
C. in the United States, Canada, Germany, the United Kingdom and Japan.
In an expansion, the cyclical rate of unemployment is most often: A. positive. B. zero. C. negative. D. equal to the natural rate of unemployment.
C. negative.
When actual output is less than potential output there is a(n): A. budget deficit. B. budget surplus. C. trade deficit. D. recessionary gap.
D. recessionary gap.
The difference between the economy's potential output and its actual output relative to its potential output at a point in time is called the: A. budget deficit. B. trade deficit. C. output gap. D. full-employment rate.
C. output gap.
In the short-run total spending affects ____, and in the long-run total spending affects ______. A. prices; output B. prices; unemployment C. output; prices D. output; unemployment
C. output; prices
The beginning of a recession is called the: A. depression. B. expansion. C. peak. D. trough.
C. peak.
In the long run, output gaps are eliminated by: A. reducing potential output. B. increasing potential output. C. price changes. D. increased efficiency in labor markets.
C. price changes.
In the long-run total spending affects ______, and output is determined by _______. A. inputs and productivity; prices B. inputs and productivity; total spending C. prices; inputs and productivity D. prices; meeting demand at preset prices
C. prices; inputs and productivity
When recessions are the result of slowing growth in potential output, the government's best response is a policy to: A. increase aggregate demand. B. decrease aggregate demand. C. promote saving and investment. D. reduce government spending.
C. promote saving and investment.
Among the most important indicators used by the NBER Business Cycle Dating Committee to determine the beginning of the 2007-2009 recession were each of the following indicators EXCEPT: A. industrial production. B. total sales in manufacturing, wholesale trade, and retail trade. C. the consumer price index. D. nonfarm employment.
C. the consumer price index.
In determining the beginning of recessions, the NBER Business Cycle Dating Committee looks for evidence of decline in: A. specific sectors of the economy. B. the rate of inflation. C. the entire economy. D. the stock market.
C. the entire economy.
In reference to short-term economic fluctuations, the "trough" refers to: A. a period in which the economy is growing at a rate significantly below normal. B. the high point of economic activity prior to a downturn. C. the low point of economic activity prior to a recovery. D. a particularly strong and protracted expansion.
C. the low point of economic activity prior to a recovery.
In the short-run ______ determines output, and in the long-run ______ determines output. A. potential output; prices B. potential output; total spending C. total spending; potential output D. total spending; prices
C. total spending; potential output
Recession in the United States typically are: A. limited to a few industries. B. limited to specific regions of the country. C. widely felt outside the United States. D. confined to the domestic economy.
C. widely felt outside the United States.
In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 3 percent, then real GDP equals: A. $98 trillion. B. $99 trillion. C. $101 trillion. D. $102 trillion.
D. $102 trillion.
If potential output equals $8 billion and actual output equals $7 billion, then this economy has an output gap equal to: A. -$1 billion. B. $1 billion. C. 12.5 percent. D. -12.5 percent.
D. -12.5 percent.
According to Okun's Law, when cyclical unemployment increases from 2 to 3 percent, the recessionary gap increases from ______ percent. A. 4 to 6 B. -2 to -3 C. 0 to 1 D. -4 to -6
D. -4 to -6
In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 3 percent, then the output gap equals: A. -1 percent. B. -2 percent. C. 1 percent. D. 2 percent.
D. 2 percent.
If the actual rate of unemployment is 4 percent, what is the natural rate of unemployment if output equals potential output? A. 0 percent B. 2 percent C. 3 percent D. 4 percent
D. 4 percent
If the frictional rate of unemployment equals 2 percent, the structural rate of unemployment equals 3 percent, and the cyclical rate of unemployment equals 1 percent, then the natural rate of unemployment equals: A. 6%. B. 1%. C. 3%. D. 5%.
D. 5%.
The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $480 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha? A. 1 percent B. 3 percent C. 4 percent D. 7 percent
D. 7 percent
If the cyclical rate of employment equals 1 percent and the actual rate of unemployment equals 8 percent, then the natural rate of unemployment must equal: A. -7 percent. B. 9 percent. C. 12.5 percent. D. 7 percent.
D. 7 percent.
If the frictional rate of unemployment equals 3 percent, the structural rate of unemployment equals 4 percent, and the cyclical rate of unemployment equals -2 percent, then the natural rate of unemployment equals: A. 1%. B. 5%. C. 6%. D. 7%.
D. 7%.
______ post-World War II ______ have been preceded by increases in inflation. A. Many; expansions B. Few; recessions C. All; expansions D. Many; recessions
D. Many; recessions
The proposition that each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gap, measured in relation to potential output, is known as: A. the recessionary gap. B. the expansionary gap. C. the Fisher effect. D. Okun's law.
D. Okun's law.
A boom is: A. a period in which the economy is growing at a rate significantly below normal. B. the high point of economic activity prior to a downturn. C. a particularly severe and protracted recession. D. a particularly strong and protracted expansion.
D. a particularly strong and protracted expansion.
Indicators of economic activity that move at the same time as the overall movement of the economy are called ______ indicators. A. short-term B. long-term C. real D. coincident
D. coincident
Okun's law expresses the relationship between: A. unemployment and inflation. B. frictional unemployment and structural unemployment. C. money and velocity. D. cyclical unemployment and the output gap.
D. cyclical unemployment and the output gap.
All of the following are characteristics of short-term economic fluctuations EXCEPT: A. expansions and recessions are felt throughout the economy. B. expansions and recessions are irregular in length and severity. C. unemployment rises during recessions. D. durable-goods industries are less sensitive to short-term fluctuations than service and non-durable industries.
D. durable-goods industries are less sensitive to short-term fluctuations than service and non-durable industries.
If firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in: A. potential output. B. prices. C. capital and technology. D. economywide spending.
D. economywide spending.
In the long run, total spending only influences: A. actual output. B. potential output. C. productive capacity. D. inflation.
D. inflation.
Short-term economic fluctuations are ______ in length and severity and ______ to predict. A. regular; difficult B. regular; easy C. irregular; easy D. irregular; difficult
D. irregular; difficult
According to Okun's Law, when the output gap is positive, cyclical unemployment: A. equals structural unemployment. B. equals frictional unemployment. C. equals zero. D. is negative.
D. is negative.
According to Okun's Law, when the output gap is negative, cyclical unemployment: A. equals structural unemployment. B. equals frictional unemployment. C. is negative. D. is positive.
D. is positive.
Which of the following workers is least likely to lose his/her job during a recession? A. carpenter B. automobile assembly line worker C. roofer D. police officer
D. police officer
A period in which the economy is growing at a rate significantly below normal is called a(n): A. expansion. B. boom. C. peak. D. recession.
D. recession.
In Macroland potential GDP equals $20 billion and real GDP equals $19.2 billion. Macroland has a(n) ______ gap equal to ______ percent of potential GDP. A. expansionary; 8 B. expansionary; 4 C. recessionary; -8 D. recessionary; -4
D. recessionary; -4
The natural rate of unemployment is the unemployment rate when there is only: A. structural unemployment. B. frictional unemployment. C. cyclical unemployment. D. structural and frictional unemployment.
D. structural and frictional unemployment.
If real GDP is greater than potential GDP, then: A. the actual unemployment rate is greater than the natural unemployment rate. B. the actual unemployment rate equals zero. C. the output gap is negative. D. the actual unemployment rate is lower than the natural unemployment rate.
D. the actual unemployment rate is lower than the natural unemployment rate.
Potential output is: A. the same as actual output. B. the same as the output gap. C. the same as the natural rate of unemployment. D. the maximum sustainable amount of output.
D. the maximum sustainable amount of output.
During recessions, the change in real GDP is: A. always positive. B. always negative. C. usually positive, but can be negative. D. usually negative, but can be positive.
D. usually negative, but can be positive.
