Chapter 5 Macro Econ Answers

(Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2007. What is the value of the price index in 2007? A) 0.88 B) 1.00 C) 1.14 D) 3.42

1.00

(Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2007. What is the value of the price index in 2008? A) 0.88 B) 1.14 C) 3.42 D) 3.90

1.14

If the cost of a market basket is $200 in 2006 and $230 in 2007, the price index for 2007 using 2006 as the base year is _____. A) 1.00 B) 1.15 C) 1.30 D) 2.00

1.15

If the cost of a market basket is $150 in 2004 and $200 in 2005, the price index for 2004 using 2005 as the base year is _____. A) 0.75 B) 1.00 C) 1.33 D) 1.50

1.33

Which of the following would be defined as inflation? A) An increase in medical care costs B) A rise in the price of real estates C) An increase in the market interest rate D) An increase in the average level of prices

An increase in the average level of prices

Which of the following individuals benefits from inflation? A) Ben, who borrowed $1,000 from a friend and agreed to pay the same amount one year later B) Mark, who lent his friend $1,000 and agreed to accept repayment of the same amount one year later C) Randall, who lives on a fixed income of $800 per month D) Asuza, who keeps her savings in the form of cash in a safe at home

Ben, who borrowed $1,000 from a friend and agreed to pay the same amount one year later

Which of the following statements is NOT true? A) A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. B) Between trough and peak, the economy is in an expansion. C) Between two peaks, the economy is in a recession. D) A complete business cycle is defined by the passage from one peak to the next.

Between two peaks, the economy is in a recession

Which of the following is NOT a consequence of deflation? A) Deflation causes uncertainty about the future. B) The threat of deflation can make people reluctant to borrow for long periods. C) Deflation causes the real value of money to fall. D) Firms may be reluctant to undertake investments for fear that the prices at which they can sell their output will drop.

Deflation causes the real value of money to fall

What is hyperinflation? A) Hyperinflation refers to an inflation rate in excess of 200 percent per year. B) Hyperinflation occurs when the government of a country sells a large number of bonds. C) It refers to a situation where a country's money supply is no longer backed by gold. D) Hyperinflation arises due to a fall in the money supply.

Hyperinflation refers to an inflation rate in excess of 200 percent per year

Which of the following is true of unanticipated inflation? A) It hurts lenders because the purchasing power of the money they collect from their borrowers is now higher. B) It hurts borrowers because they repay their debts with money that is now worth more. C) It helps lenders because the purchasing power of the money they collect from their borrowers is now higher. D) It helps borrowers because they repay their debts with money that is now worth less.

It helps borrowers because they repay their debts with money that is now worth less

Which of the following is NOT a consequence of unanticipated inflation? A) It increases the purchasing power of money. B) It reduces the value of future obligations. C) It increases uncertainty about the future. D) It reduces the incentives of firms to undertake investments.

It increases the purchasing power of money

What is a sub-prime mortgage? A) It is a mortgage loan offered at an interest rate below the prime lending rate. B) It is a mortgage loan made to a homeowner by an insolvent lender. C) It is a mortgage loan made to a buyer whose credit or income would not ordinarily qualify for a mortgage loan. D) It is a mortgage loan made to a buyer whose excellent credit score earns the buyer a preferential interest rate

It is a mortgage loan made to a buyer whose credit or income would not ordinarily qualify for a mortgage loan

What is a business cycle? A) It is a firm's pattern of sales during a given year. B) It is the economy's pattern of fluctuations in economic activity: expansion followed by contraction and then by another expansion. C) It is the seasonal pattern of fluctuations in consumer spending: increased spending during the holiday season and decreased spending at other times of the year. D) It refers to the peaks and troughs in the demand for luxury goods in a country.

It is the economy's pattern of fluctuations in economic activity: expansion followed by contraction and then by another expansion

The price index for 2007 is 1.28. What does this mean? A) It means that the average price level has increased by 128 percent over 2006. B) It means that the average price level has increased by 1.28 percent over the base year. C) It means that the average price level of the base year was 128 percent less than that in 2007. D) It means that the average price level has increased by 28 percent over the base year.

It means that the average price level has increased by 28 percent over the base year

Your grandfather tells you that his Social Security payments are indexed. What does this mean? A) It means that the dollar value of his Social Security payment is adjusted for changes in the price level so that his purchasing power is constant. B) It means that the dollar value of his Social Security payments is adjusted for changes in the price level so that his purchasing power increases at the same rate as inflation. C) It means that the value of his Social Security payments is not adjusted for changes in the price level so his purchasing power may fall. D) It means that the real value of his Social Security payment is adjusted for changes in the price level so that its nominal value is constant.

It means that the dollar value of his Social Security payment is adjusted for changes in the price level so that his purchasing power is constant

Which of the following statements is true of inflation? A) It refers to a decrease in the general price level in an economy. B) It refers to a rise in the price level of gasoline. C) It refers to a constant general price level in an economy. D) It refers to an increase in the average level of prices.

It refers to an increase in the average level of prices

Consider a bakery that buys flour to bake cakes. Which of the following statements is true? A) The value of the cake and the flour used to make the cake are counted as part of GDP. B) Only the value of the cake is counted in GDP. C) Only the value of the flour used to make the cake is counted in GDP. D) Only the difference between the value of the cake and the value of the flour is counted in GDP.

Only the value of the cake is counted in GDP

Suppose nominal GDP in a country rose in the third quarter of 2008 (from the second quarter). Yet, real GDP fell in the third quarter of 2008. What could have accounted for this? A) The economy's price level declined over the second and third quarters of 2008. B) The general price level in the economy in the third quarter is higher than that in the second quarter of 2008. C) Production of goods must have increased by a greater rate than the increase in the economy's price level. D) The population of the country must have increased over the last quarter.

The general price level in the economy in the third quarter is higher than that in the second quarter of 2008

Which of the following is NOT true of price indexes? A) They show changes in the general level of prices. B) They are used to estimate the rate of inflation or deflation. C) They are used to convert nominal values to real values, so comparisons can be made across time. D) They are used to compute the growth rate of real output in the economy.

They are used to compute the growth rate of real output in the economy

Which of the following statements is true? A) Unexpected inflation benefits lenders and hurts borrowers. B) Unexpected deflation benefits lenders and hurts borrowers. C) Unexpected inflation benefits borrowers but does not affect lenders. D) Unexpected deflation benefits lenders but does not affect borrowers.

Unexpected deflation benefits lenders and hurts borrowers

Deflation is defined as: A) a decrease in the inflation rate. B) a fall in the average price level. C) a period during which the average price level is low. D) a low rate of change in average prices.

a fall in the average price level

(Exhibit: Real GDP Over Time) A typical business cycle begins: A) at t1 and ends at t2. B) at t1 and ends at t3. C) at t2 and ends at t3. D) at t2 and ends at t4.

at t1 and ends at t3

(Exhibit: Real GDP Over Time) The trough of the business cycle occurs: A) between t1 and t2. B) at t1. C) between t2 and t3. D) at t2.

at t2

(Exhibit: Real GDP Over Time). The peak of the business cycle occurs: A) between t1 and t3. B) at t3. C) between t2 and t3. D) at t2.

at t3

(Exhibit: Real GDP and Employment) The exhibit shows data on real GDP and employment for a particular country from the year 1991 to 2000. A complete business cycle: A) commenced in 1994 and ended in 1997. B) commenced in 1991 and ended in 1994. C) commenced in 1994 and ended in 1999. D) commenced in 1991 and ended in 1996.

commenced in 1994 and ended in 1999

The formula for calculating a price index is: A) current cost of basket ÷ base-period cost of basket. B) base-period cost of basket ÷ current cost of basket × 100. C) (base-period cost of basket ÷ current cost of basket) × current nominal value of basket. D) percentage change in current cost of basket ÷ percentage change in base-period cost of basket.

current cost of basket ÷ base-period cost of basket

A sustained period of rising real GDP is called a(n): A) peak. B) trough. C) expansion. D) recession.

expansion

The value, at current market prices, of the final goods and services produced during a particular period is: A) net national product. B) gross foreign factor output. C) gross personal product. D) gross domestic product.

gross domestic product

The trough of the business cycle: A) comes right after the expansion phase. B) comes before the recession phase. C) occurs when the actual rate of unemployment in the economy is zero. D) is the point where a recession ends and an expansion begins.

is the point where a recession ends and an expansion begins

The peak of the business cycle: A) usually occurs when the natural rate of unemployment is equal to its actual rate. B) is the minimum level of nominal GDP. C) is the point where an expansion ends and a recession begins. D) usually occurs immediately before the expansion phase.

is the point where an expansion ends and a recession begins

(Exhibit: Real GDP and Employment) The exhibit shows data on real GDP and employment for a particular country from the year 1991 to 2000. The trough(s) in economic activity occurred: A) once in the ten-year period, in 1996. B) twice in the ten-year period, in 1996 and in 2000. C) once in the ten-year period, in 1991. D) thrice in the ten-year period, in 1991, in 1996, and in 2000.

once in the ten-year period, in 1996

A complete business cycle is defined by the passage from: A) one peak to the next peak. B) one peak to the next trough. C) one trough to the ensuing expansion. D) one recession to the next recession.

one peak to the next peak

The point on a business cycle where real GDP stops rising and begins falling is called a(n): A) peak. B) trough. C) expansion. D) recession.

peak

The logical sequence of the phases of a business cycle is: A) peak, trough, expansion, recession. B) peak, expansion, trough, recession. C) peak, recession, trough, expansion. D) peak, expansion, recession, trough.

peak, recession, trough, expansion

A(n) _____ shows the movement in the average level of prices. A) interest rate B) GDP growth rate C) price index D) natural rate of unemployment

price index

The total value of all final goods and services produced in a country during a given period, adjusted to eliminate the effects of changes in prices is called: A) nominal GDP. B) current GDP. C) real GDP. D) average GDP.

real GDP

To best determine whether an economy's output is growing or shrinking, one must keep track of changes in: A) nominal GDP. B) the growth rate of nominal GDP. C) the general price level. D) real GDP.

real GDP

Economic data that are adjusted for price-level changes are said to be expressed in terms of: A) indexed dollars. B) deflated dollars. C) nominal dollars. D) real dollars.

real dollars

A sustained period of falling real GDP is a(n) A) peak. B) trough. C) expansion. D) recession.

recession

Over time, _____ has/have been the general trend for most economies. A) constant real GDP B) rising real GDP C) falling real GDP and a rising price level D) constant nominal GDP and a falling price level

rising real GDP

The terms inflation and deflation refer to changes in: A) the average level of prices. B) the average output level. C) the prices of goods supplied by the government. D) the prices in black markets.

the average level of prices

The costs of the market basket in the current period will be compared against the costs of the market basket in _____ when computing a price index. A) the expansion period B) the recession period C) the adjustment period D) the base period

the base period

An indexed payment is a payment for which: A) the nominal value does not change with the rate of change in the price level. B) the nominal value is constant. C) the nominal value changes with the rate of change in the price level. D) the nominal value is equal to the real value, when inflation is positive.

the nominal value changes with the rate of change in the price level

Real GDP is multiplied by _____ to get nominal GDP. A) the quantity of money supply B) the price index C) the exchange rate D) the nominal interest rate

the price index

The point at which a recession ends and the expansion begins is called the: A) trough. B) downturn. C) peak. D) lag.

trough

The point on a business cycle when real GDP stops falling and begins rising is called a(n): A) trough. B) recession. C) peak. D) expansion.

trough

(Exhibit: Real GDP and Employment) The exhibit shows data on real GDP and employment for a particular country from the year 1991 to 2000. The peak(s) in economic activity occurred: A) once in the ten-year period, in 1999. B) twice in the ten-year period, in 1998 and in 1999. C) once in the ten-year period, in 1994. D) twice in the ten-year period, in 1994 and in 1999.

twice in the ten-year period, in 1994 and in 1999

To identify the onset of a recession, the National Bureau of Economic Research (NBER) Business Cycle Dating Committee: A) uses data on nominal GDP for two consecutive quarters. B) uses a range of indicators including real GDP, employment and income. C) identifies declining economic activity solely based on a fall in real GDP. D) uses a procedure that determines the dates of peaks and troughs mainly on the basis of employment.

uses a range of indicators including real GDP, employment and income

Assuming a constant level of nominal income, the real income of an individual rises: A) during an inflationary phase in the economy. B) when deflation occurs in the economy. C) if hyperinflation takes place. D) with a rise in natural rate of unemployment.

when deflation occurs in the economy