Deck 20: Macroeconomics: the Big Picture

Question 1

The peak of the business cycle

A)usually occurs when the actual rate of unemployment equals the natural rate.
B)is a temporary minimum level of real GDP.
C)is a temporary maximum level of real GDP.
D)usually occurs immediately after the recession phase.

Answer 1

C

Question 2

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 expansion to the next expansion.

Answer 2

A

Question 3

Refer to Figure 5-1.The trough of the business cycle occurs

A)between t₁ and t₂.
B)at t₁.
C)between t₂ and t₃.
D)at t₂.

Answer 3

D

Question 4

Refer to Figure 5-1.Which of the following statements is true?

A)The economy experiences increasing cyclical unemployment between t₁ and t₂.
B)The economy experiences decreasing structural unemployment and increasing cyclical unemployment between t₁ and t₂.
B)The economy experiences increasing structural unemployment between t₂ and t₃.
C)The economy experiences increasing cyclical unemployment between t₂ and t₃.

Question 5

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 an expansion.
C)It is the pattern of fluctuations in consumer spending: increased spending during the summer months and holiday seasons and decreases at other times of the year.
D)It is the pattern of growth in gross domestic product over the long run.

Question 6

Economic data that are adjusted for price-level changes are said to be expressed in terms of

A)historical dollars.
B)variable dollars.
C)nominal dollars.
D)real dollars.

Question 7

To determine whether an economy's output is growing or shrinking, one must keep track of

A)changes in nominal GDP.
B)changes in the growth rate of nominal GDP.
C)changes in the general price level.
D)changes in real GDP.

Question 8

A period of falling real GDP is a(n)

A)peak.
B)trough.
C)expansion.
D)recession.

Question 9

A recession will lead to an increase in ________ unemployment.

A)cyclical
B)frictional
C)transitional
D)structural

Question 10

A recovery will lead to a decrease in ________ unemployment.

A)cyclical
B)transitional
C)structural
D)frictional

Question 11

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.

Question 12

The trough of the business cycle

A)comes right after the expansion phase.
B)comes before the recession phase.
C)is a temporary maximum level of real GDP.
D)is a temporary minimum level of real GDP.

Question 13

A period of rising real GDP is a(n)

A)peak.
B)trough.
C)expansion.
D)recession.

Question 14

The value, at current market prices, of the final goods and services produced during a particular period is

A)disposable personal product.
B)gross foreign factor output.
C)gross personal product.
D)gross domestic product.

Question 15

Suppose the nominal GDP 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)It is due to the fall in the economy's price level over the second and third quarters of 2008.
B)It is due to an increase in the economy's price level over the second and third quarters of 2008.
C)Output must have increased by a greater rate than the increase in the economy's price level.
D)There must have been a statistical error in the computations.

Question 16

Refer to Figure 5-1.The peak of the business cycle occurs

A)between t₁ and t₃.
B)at t₃.
C)between t₂ and t₃.
D)at t₂.

Question 17

GDP measures the value of final goods and services.Consider a pizza parlor that buys flour to make pizzas.Which of the following statements is true?

A)The value of the pizza and the flour used to make the pizza are counted as part of GDP.
B)Only the value of the pizza is counted in GDP to avoid double counting.
C)Only the value of the flour used to make the pizza is counted in GDP to avoid double counting.
D)Only the difference between the value of the pizza and the value of the flour is counted in GDP.

Question 18

Refer to Figure 5-1.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.

Question 19

The point at which a recession ends and the expansion begins is called the

A)trough.
B)downturn.
C)peak.
D)lag.

Question 20

What is a sub-prime mortgage?

A)It is a mortgage loan which carries an interest rate below the prime lending rate.
B)It is a 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 outstanding credit score earns the buyer a preferential interest rate.

Question 21

Unanticipated inflation

A)hurts lenders because the purchasing power of the money they collect from their borrowers is now lower.
B)hurts borrowers because they must repay their debts with money that is now worth more.
C)helps lenders because the purchasing power of the money they collect from their borrowers is now higher.
D)helps borrowers because they must repay their debts with money that is now worth less.

Question 22

The point on a business cycle when real GDP stops falling and begins rising is a(n)

A)peak.
B)trough.
C)expansion.
D)recession.

Question 23

When there is inflation,

A)although prices on the average are increasing, some prices are rising and other are falling.
B)all prices are increasing.
C)the real incomes of all income earners are decreasing.
D)the economy must be producing below full employment.

Question 24

The value of a unit of money, such as the dollar, always varies

A)directly with the price of gold.
B)inversely with the price of gold.
C)inversely with the average price of gold and silver.
D)inversely with the average level of prices.

Question 25

The point on a business cycle when real GDP stops rising and begins falling is a(n)

A)peak.
B)trough.
C)expansion.
D)recession.

Question 26

The terms inflation and deflation

A)refer to what is happening to the average level of prices.
B)refer to what is happening to particular prices.
C)refer to a decrease in the price of gasoline or an increase in the price of gasoline.
D)refer to an increase in the price of gasoline or a decrease in the price of gasoline.

Question 27

Which of the following constitutes inflation?

A)an increase in medical care costs
B)high prices for new homes
C)an increase in the market interest rate
D)an increase in the average level of prices

Question 28

Which of the following statements is false?

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)Expansion is the normal state of the economy

Question 29

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.

Question 30

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.

Question 31

What is a hyperinflation?

A)It is an inflation rate in excess of 200 percent per year.
B)It is a combination of excessive increase in the price level and rising unemployment.
C)It refers to a situation where a country's money supply is no longer backed by gold.
D)It is a situation in which financial markets collapse and the government is forced to print money.

Question 32

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.

Question 33

Which of the following is a consequence of unanticipated inflation?
I.It reduces the value of money.
II.It increases the value of future obligations.
III.It increases uncertainty about the future.

A)I only
B)I and II only
C)I and III only
D)I, II, and III

Question 34

Which of the following statements is true?

A)Over time, the general trend for most economies is one of constant real GDP.
B)Over time, the general trend for most economies is one of rising real GDP.
C)Over time, the general trend for most economies is one of falling real GDP and rising price level.
D)Over time, the general trend for most economies is one of rising real GDP and constant price level.

Question 35

To identify the onset of a recession, the National Bureau of Economic Research (NBER)Business Cycle Dating Committee,

A)tracks real GDP and nominal GDP for two consecutive quarters only.
B)uses a range of indicators including real GDP, employment and income.
C)identifies economic activity solely with real GDP.
D)uses procedure that determines the dates of peaks and troughs mainly on the basis of employment.

Question 36

If deflation occurs and your income is fixed,

A)your real income falls.
B)your real income rises.
C)your real income remains unchanged.
D)your real income equals your nominal income.

Question 37

The sequence of a business cycle phases is

A)peak, trough, expansion, recession.
B)peak, expansion, trough, recession.
C)peak, recession, trough, expansion.
D)peak, expansion, recession, trough.

Question 38

A number whose movement reflects movement in the average level of prices is called

A)unemployment.
B)inflation.
C)a price index.
D)an unemployment rate.

Question 39

Which of the following statements is true?
I.Inflation refers to an increase in the average level of prices.
II.Inflation refers to the general level of prices prevailing in an economy.
III.Inflation to high prices for most goods and services.

A)I, II, and III
B)I and II only
C)I and III only
D)I only

Question 40

Which of the following individuals is not hurt by inflation?

A)Akshay, who borrowed $1,000 from a friend and agreed to pay the same amount one year later, but during the year, prices increased by 10 percent.
B)Vjiay, who lent his friend $1,000 and agreed to accept repayment of the same amount one year later, but during the year, prices increased by 10 percent.
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.

Question 41

The consumer price index reflects

A)the changes in the prices of goods and services typically purchased by consumers.
B)the average level of prices for intermediate goods and services purchased by business.
C)the median price of a typical single family home.
D)prices of all goods and services computed from the ratio of nominal GDP to real GDP.

Question 42

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 the inflation rate.
C)It means that the real value of his Social Security payment is adjusted for changes in the price level so that his purchasing power increases at the same rate as the inflation rate.
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.

Question 43

Which of the following is the broadest based price index?

A)the consumer price index
B)the producer price index
C)the implicit price deflator
D)the personal consumption expenditures price index

Question 44

Economists measure the price level

A)by keeping track of nominal GDP.
B)using a price index.
C)by measuring the growth rate in money supply.
D)by measuring the growth rate in real GDP.

Question 45

If the nominal GDP in 2002 is $8,000 billion and the implicit price deflator is 1.4, what is the value of real GDP in 2002?

A)$700 billion
B)$5,714 billion
C)$8,000 billion
D)$11,200 billion

Question 46

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.

Question 47

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 has increased by 28 percent over 2006.
D)It means that the average price level has increased by 28 percent over the base year.

Question 48

The CPI is a useful index for all of the following reasons except

A)it is used to determine whether people's incomes are keeping up with the costs of the things they buy.
B)it is used to measure changes in the cost of living.
C)it used to measure the average price level of all final goods and services produced.
D)it is used to compute the U.S.inflation rate.

Question 49

The implicit price deflator is given by the formula

A)nominal GDP in current period ÷ nominal GDP in base period.
B)nominal GDP in current period ÷ real GDP in base period.
C)nominal GDP ÷ real GDP.
D)real GDP ÷ nominal GDP.

Question 50

To measure the "core" inflation rate, the Bureau of Economic Analysis uses a price measure that

A)excludes food and energy prices because the prices of these items can be volatile.
B)includes food and energy prices because the se items account for a significant portion of the typical consumer's expenditures.
C)is made up of a fixed basket that includes durable goods, non-durable goods, and services.
D)includes prices for different components of gross private domestic investment, government spending, and personal consumption expenditures.

Question 51

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.
C)(base period ÷ current period)× value of the market basket.
D)percentage change in current cost of basket ÷ percentage change in base-period cost of basket.

Question 52

When the media report the U.S.inflation rate, the number cited is usually a rate computed using

A)the implicit price deflator.
B)the consumer price index.
C)the personal consumption expenditures price index.
D)the ratio of real and nominal wages.

Question 53

A period of time against which costs of the market basket in other periods will be compared in computing a price index is called

A)the inflation period.
B)the market basket.
C)the adjustment period.
D)the base period.

Question 54

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.

Question 55

Which of the following is true of price indexes?
I.They indicate what is happening to the general level of prices.
II.They are used to estimate the rate of inflation or deflation.
III.They are used to convert nominal values to real values, so comparisons can be made across time.

A)I only
B)I and II only
C)I and III only
D)I, II, and III

Question 56

An indexed payment is one

A)whose real value changes with the rate of change in the price level.
B)whose nominal value is held constant.
C)whose dollar value changes with the rate of change in the price level.
D)whose nominal value is equal to its value.

Question 57

Suppose in 2007, nominal GDP in Clarendon was $12,840 billion and real GDP was $10,560 billion.Calculate the value of the implicit price deflator.Follow the convention of multiplying price indexes by 100.

A)21.59
B)82.24
C)121.59
D)177.57

Question 58

Which of the following statements is true?
I.The CPI is computed using a fixed basket of goods.
II.The implicit price deflator is computed a fixed basket of goods.
III.The CPI and the implicit price deflator can be used to calculate inflation.

A)I, II, and III
B)I and II only
C)I and III only
D)II and III only

Question 59

If the real GDP in 2003 is $12,400 billion and the implicit price deflator is 1.4, what is the value of nominal GDP in 2003?

A)approximately $886 billion.
B)approximately $8,857 billion.
C)approximately $15,427 billion.
D)$17,360 billion.

Question 60

The market basket used to computing the implicit price deflator for a particular period includes

A)all final goods and services consumed in that period.
B)all final goods and services produced in that period.
C)goods and services purchased by typical consumers.
C)all final and intermediate goods and services produced in that period.

Question 61

Which of the following individuals would not be included in the labor force?

A)Kit, who has retired and is not looking for work.
B)Divy, who is on temporary layoff from General Motors.
C)Soraya, a recent college graduate, who does not have a job, but has applied for several in the last week.
D)Giles, a physician who chooses to work part-time.

Question 62

In 1998, the average price of the baseball fan market basket (based on the cost of the basket for 30 major league baseball teams)was $121.36 compared to $191.92 (for the same basket)in 2008.Calculate the inflation rate experienced by a typical baseball fan over this period.

A)approximately 16%
B)approximately 37%
C)approximately 58%
D)approximately 71%

Question 63

If the consumer price index falls from 1.40 to 1.35 in a year, what is the deflation rate?

A)5%
B)3.57%
C)9.25%
D)10.37%

Question 64

Which of the following statements best describes the substitution bias in the construction of the CPI?

A)Not taking into account that consumers alter their buying habits as new products come into being and lifestyles change, for example, the rising popularity of cell phones instead of land-line phones.
B)Not accounting for the fact that consumers are effectively getting more product for their money because technological changes have led to improvements in quality and lower production costs over time.
C)The failure to recognize that over time consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives.
D)The failure to capture the fact that consumers have made substitutions in their shopping habits: shifting from high-priced department stores to lower-priced discount stores.

Question 65

The inflation rate can be calculated using

A)any price index.
B)only the consumer price index.
C)only the implicit price deflator.
D)only the government spending price index.

Question 66

In 2008, the average price of the baseball fan market basket (based on the cost of the basket for 30 major league baseball teams)was $191.92.The cost of attending a Boston Red Sox game was $320.71 in 2008.Calculate the fan price index for the Boston Red Sox using the average price of the market basket as the equivalent of a base year.

A)0.59
B)0.67
C)1.67
D)4.01

Question 67

In the Case in Point titled "Take Me Out to the Ball Game ...", the fan price index used to track the costs of going to baseball games uses

A)a fixed market basket of goods and services, like the consumer price index.
B)a varying market basket of goods and services, like the consumer price index.
C)a varying market basket of goods and services, like the implicit price deflator.
D)a fixed market basket of goods and services, like the implicit price deflator.

Question 68

What is the difference between a nominal value and a real value?

A)A nominal value is measured in monetary units while a real value is measured in current dollars.
B)A nominal value is measured in market rates while a real value is measured in terms of exchange rates.
C)A nominal value is measured in units of constant purchasing power while a real value is measured in units of current purchasing power.
D)A nominal value is measured in current market prices while a real value is measured in base year prices.

Question 69

Which of the following exemplifies the outlet bias in the computation of the CPI?

A)Roxanna refuses to shop at factory outlet stores because she says that the layouts of the stores are too chaotic and therefore is too time-consuming.
B)Yu-Jen does most of her family's shopping at Costco instead of Safeway because the prices at Costco are more competitive.
C)Katie prefers to buy her groceries at Whole Foods because they carry a wide selection of organic produce.
D)Diana does her holiday shopping when she travels to China to take advantage of the "great deals" on most items.

Question 70

According to the Bureau of Labor Statistics, a person who is not working and is not looking for work is

A)considered unemployed.
B)considered underemployed.
C)counted as a "not currently working" member of the labor force.
D)not a member of the labor force.

Question 71

An unemployed person is

A)one who is eligible to work but chooses not to work.
B)one who is not working.
C)a person without a job who is actively seeking and available for work.
D)one who can only find jobs that are below his abilities.

Question 72

Which of the following is a shortcoming of a fixed market basket type index?
I.It does not reflect consumer responses to changing prices.
II.It excludes new goods and services.
III.It may not completely account for quality changes.

A)I only
B)I and II
C)I and III
D)I, II, and III

Question 73

Since late 2006, OPEC has successfully raised world oil prices significantly.These price increases have caused inventors to explore alternative sources of energy, for example bio-fuels.Consumers too have started switching toward hybrid automobiles and toward automobiles that use bio-fuels, both of which are cheaper to operate than gasoline engines.Which problems in the construction of the CPI does this situation represent?

A)substitution bias and introduction of new goods
B)introduction of new goods and unmeasured quality change
C)unmeasured quality change and new goods
D)income bias and substitution bias

Question 74

A quality-change bias in the construction of the CPI arises because

A)new goods and services are routinely introduced and many of them are not incorporated into the market basket that makes up the CPI.
B)big box stores that carry electronic goods routinely run sales to reduce their inventories before stocking new models.
C)prices of most durable goods do not reflect improvements in quality of these goods.
D)quality differences between the goods priced in two different periods cannot be accurately measured and deducted from the accompanying price difference between the goods.

Question 75

If the CPI is 120 in 2005 and 150 in 2006, what is the rate of inflation over this period?

A)8%
B)20%
C)25%
D)30%

Question 76

Price indexes that employ fixed market baskets

A)are likely to understate inflation.
B)are likely to overstate inflation.
C)are likely to accurately measure inflation.
D)cannot be used to measure inflation.

Question 77

The CPI is used for calculating payments from the U.S.government to individuals.To the extent that it is biased upward, which of the following is likely to occur?
I.It leads to the payment of lower benefits than would be the case if the index accurately measures inflation.
II.It leads to the payment of higher benefits than would be the case if the index accurately measures inflation.
III.It raises government expenditures.
IV.It lowers government expenditures.

A)I only
B)II only
C)I and IV
D)II and III

Question 78

If all prices experience an increase of 4 percent in one year, which of the following is true?

A)The rate of inflation for that year is 4 percent.
B)The relative prices of all goods went up by 4 percent in that year.
C)We cannot determine if there is inflation or not.
D)The economy is likely to experience deflation in the near future.

Question 79

The labor force is made up of

A)all individuals who are employed.
B)those who are employed plus those who are unemployed.
C)the population of a nation, aged 16 years and above.
D)all individuals who are working and those who are not working.

Question 80

The inflation rate in 2007 is

A)the percentage of change between the price index in 2007 and the price index in the base year.
B)the percentage of change between the price index in 2007 and the price index in 2006.
C)the difference between the value of price index 2007 and the value of the price index in 2006.
D)the ratio of the 2007 price index and 2006 price index.