Deck 5: Foundations of the Macroeconomy

Question 1

Typically, when real GDP goes up over a period of, say, one year, the rate of:

A) inflation tends to fall.
B) employment tends to fall.
C) unemployment tends to fall.
D) employment tends to remain unchanged.

Answer 1

unemployment tends to fall.

Question 2

A decrease in real GDP should lead to:

A) a decrease in the general level of prices
B) a decrease in the rate of unemployment.
C) an increase in the rate of unemployment.
D) an increase in the labor force participation rate of prime age workers.

Answer 2

an increase in the rate of unemployment.

Question 3

Which of the following statements is FALSE?

A) Changes in real GDP can cause changes in an economy's level of employment.
B) The U.S. economy tends to operate at a particular level of output for a long period of time.
C) The general level of prices in an economy can be affected as output expands toward full employment.
D) The level of activity in a market economy is always going through periods of expansion and contraction.

Answer 3

The U.S. economy tends to operate at a particular level of output for a long period of time.

Question 4

A business cycle is:

A) a recurring period of growth and decline in an economy's real output.
B) the amount of time required to exhaust an economy's inventory of goods.
C) the order and timing of steps that must be completed to produce a product.
D) the period of time from the organization of a business until it ceases operations.

Question 5

Which of the following statements about business cycles is FALSE?

A) They are wavelike movements of economic activity.
B) They are recurring periods of growth and decline in an economy's real GDP.
C) They have five phases which occur in this order: recovery, peak, recession, depression, trough.
D) The expansion and contraction of economic activity is not of equal length or intensity in all business cycles.

Question 6

The phases of a business cycle are:

A) upswing, downswing.
B) recovery, peak, recession, trough.
C) expansion, full employment plateau, recession, depression.
D) full employment phase, natural rate of unemployment phase, full employment phase.

Question 7

The four phases of a business cycle, and their correct order, are:

A) peak, trough, recession, and recovery.
B) peak, recovery, trough, and recession.
C) peak, recession, trough, and recovery.
D) peak, recession, recovery, and trough.

Question 8

The phase of the business cycle where real GDP, or output, reaches its maximum is the:

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

Question 9

The phase of the business cycle where real GDP, or output, is contracting is the:

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

Question 10

The phase of the business cycle during which economic activity hits its minimum level is the:

A) trough.
B) recession.
C) depression.
D) none of the above.

Question 11

The federal government attempts to control business cycles because:

A) increases in economic activity could lead to inflation.
B) decreases in economic activity lead to reduced output.
C) decreases in economic activity lead to higher unemployment.
D) all of the above.

Question 12

Government intervention during the recession phase of a business cycle is designed to minimize the effects of loss of:

A) jobs.
B) output.
C) ability to spend.
D) all of the above.

Question 13

Government intervention during the recovery phase of a business cycle is designed to minimize the effects of:

A) cost-push inflation.
B) demand-pull inflation.
C) cyclical unemployment.
D) structural unemployment.

Question 14

Since the late 1940s, the American economy has had:

A) recession and recovery phases of about equal length.
B) relatively long periods of recovery as compared to periods of recession.
C) relatively long periods of recession as compared to periods of recovery.
D) relatively long periods during which the level of activity is at a peak and unchanging.

Question 15

-Which of these figures best illustrates the behavior of real GDP in the U.S. economy over the last few decades?

A) A.
B) B.
C) C.
D) D.

Question 16

-You would expect the rate of unemployment to be falling in the economy operating at point:

A) 1 in Figure A.
B) 2 in Figure B.
C) 3 in Figure C.
D) 4 in Figure D.

Question 17

-You would expect the rate of unemployment to be increasing in the economy operating at point:

A) 1 in Figure A.
B) 2 in Figure B.
C) 3 in Figure C.
D) 4 in Figure D.

Question 18

A review of prior business cycles allows us to conclude that the phases of different business cycles are of:

A) uniform duration, and equal intensity.
B) uniform duration, but unequal intensity.
C) non-uniform duration, but equal intensity.
D) non-uniform duration, and unequal intensity.

Question 19

When comparing two business cycles, you should expect:

A) the sequence of phases to be the same in both cycles.
B) the amount of time in each phase to be the same in both cycles.
C) the intensity of the expansion or contraction to be the same in both cycles.
D) none of the above.

Question 20

Which of the following statements about theories explaining why an economy expands or contracts is FALSE?

A) There are several explanations for changes in the level of economic activity.
B) At one time, people thought that changes in the level of economic activity were caused by sun spots.
C) At any given time you should expect there to be only one generally accepted theory explaining changes in the level of economic activity.
D) Efforts to explain changes in the level of economic activity are not a recent development driven by the availability of extensive data and sophisticated computer-based resources.

Question 21

The sequence of events in an expansion can be categorized as:

A) increased spending $\rightarrow$ higher output $\rightarrow$ higher employment $\rightarrow$ higher income.
B) increased spending $\rightarrow$ higher income $\rightarrow$ higher employment $\rightarrow$ higher output.
C) increased spending $\rightarrow$ higher employment $\rightarrow$ higher income $\rightarrow$ higher output.
D) increased spending $\rightarrow$ higher income $\rightarrow$ higher output $\rightarrow$ higher employment.

Question 22

The sequence of events in a recession can be categorized as:

A) decreased spending $\rightarrow$ 0lower output $\rightarrow$ lower employment $\rightarrow$ lower income.
B) decreased spending $\rightarrow$ lower income $\rightarrow$ lower employment $\rightarrow$ lower output.
C) decreased spending $\rightarrow$ lower employment $\rightarrow$ lower income $\rightarrow$ lower output.
D) decreased spending $\rightarrow$ lower income $\rightarrow$ lower output $\rightarrow$ lower employment.

Question 23

The most important determinant of an economy's levels of total output, employment, and income is:

A) total spending.
B) the level of prices.
C) the balance of trade.
D) congressional policies for domestic programs.

Question 24

The basic factor causing changes in the level of economic activity is changes in the level of:

A) prices.
B) total spending.
C) unemployment.
D) business income.

Question 25

Aggregate, or total, spending is the combined spending for new goods and services of all:

A) households.
B) households and businesses.
C) households, businesses, and government units.
D) households, businesses, government units, and foreign buyers.

Question 26

Total, or aggregate, spending includes spending on newly produced goods and services:

A) and on financial assets such as stocks and bonds.
B) by households, businesses, government units, and foreign buyers.
C) by households, businesses, and government units, but not foreign buyers.
D) that is based on earned income, but not transfer payments, borrowing, and savings.

Question 27

Total spending on newly produced goods and services:

A) is the main force determining the economy's levels of output, employment, and income.
B) will have a dampening effect on the economy when it falls, and an expansionary effect when it increases.
C) is made up of the combined spending of all households, businesses, government units and foreign buyers in the economy.
D) all of the above.

Question 28

The sector of the economy that purchases the most goods and services is the:

A) foreign sector.
B) business sector.
C) household sector.
D) government sector.

Question 29

Over time, the most stable spending in the economy is:

A) purchases by foreign buyers.
B) business investment spending.
C) government purchases of goods and services.
D) household personal consumption expenditures.

Question 30

Household spending:

A) is based primarily on unearned income.
B) tends to fluctuate widely as the economy moves through the business cycle.
C) is larger than the combined spending of all U.S. businesses, government units, and foreign buyers.
D) all of the above.

Question 31

Personal consumption expenditures is spending by households:

A) on new goods and services.
B) on food and other goods, but not services.
C) on new goods and services that originates only with transfer payments.
D) plus businesses and the government on food and other nondurable goods.

Question 32

The main determinant of total household spending is the:

A) size of household income.
B) stock of household wealth.
C) level of household borrowing.
D) availability of government transfer payments.

Question 33

In macroeconomics, "income-determined spending"is:

A) spending by businesses based on income earned from the sale of their products.
B) household spending based on income earned from producing goods and services.
C) spending on income earning assets, such as factories, machinery, and interest-bearing securities.
D) all of the above.

Question 34

If the only spending in the economy were household spending based on earned income, and if households always spent all of their incomes, from one year to the next the level of economic activity would:

A) increase.
B) decrease.
C) not change.
D) change in no predictable way.

Question 35

Money received by a household from the government for which there is no work directly performed in return is:

A) a surtax.
B) a payment-in-kind.
C) a transfer payment.
D) an income tax refund.

Question 36

Injections are spending from:

A) household earned income that lead to an increase in output, employment, and income.
B) household earned income that lead to a decrease in output, employment, and income.
C) sources other than household earned income that lead to an increase in output, employment, and income.
D) sources other than household earned income that lead to a decrease in output, employment, and income.

Question 37

Injections into the spending stream come from:

A) household earned income.
B) profits, rents, and interest, but not wages.
C) household earned income, transfer payments, and borrowing.
D) sources other than household earned income, and include transfer payments and borrowing.

Question 38

Spending that comes from a source other than household earned income is:

A) secondary spending.
B) nonincome-determined spending.
C) a leakage from the spending stream.
D) not included in calculations of total spending.

Question 39

Which of the following is an injection into the spending stream from the household sector?

A) Income-determined spending.
B) Savings from earned income.
C) Spending based on borrowing.
D) The payment of personal taxes to the government.

Question 40

Which of the following is an injection into the spending stream?

A) Taxes paid to the government.
B) Spending from transfer payments.
C) Spending from household earned income.
D) All of the above.

Question 41

Spending from borrowing, and saving from income are:

A) both injections into the spending stream.
B) both leakages from the spending stream.
C) injections into, and leakages from, the spending stream, respectively.
D) leakages from, and injections into, the spending stream, respectively.

Question 42

Which of the following is a leakage from the spending stream by households?

A) Saving.
B) A decrease in earned income.
C) The receipt of transfer payments.
D) Borrowing from financial institutions.

Question 43

Leakages are earned income that is:

A) spent, which leads to a decrease in output, employment, and income.
B) spent, which leads to an increase in output, employment, and income.
C) not spent, which leads to a decrease in output, employment, and income.
D) not spent, which leads to an increase in output, employment, and income.

Question 44

Personal consumption expenditures would likely increase if there were a decrease in:

A) households' incomes.
B) saving by households.
C) borrowing by households.
D) transfer payments to households.

Question 45

Personal consumption expenditures would likely increase if there were an increase in:

A) taxes.
B) savings.
C) transfer payments.
D) all of the above.

Question 46

An increase in transfer payments would directly increase:

A) income-determined spending.
B) unemployment in the economy.
C) nonincome-determined spending.
D) leakages from the spending stream.

Question 47

Holding all else equal, you would expect the level of economic activity to decrease if household spending from transfer payments:

A) were less than spending from borrowed funds.
B) and borrowed funds were less than saving plus taxes.
C) and borrowed funds were less than spending from earned income.
D) all of the above.

Question 48

Holding all else equal, you would expect the level of economic activity to increase if household:

A) saving were less than taxes.
B) saving plus taxes were more than earned income.
C) saving plus taxes were less than spending from borrowed funds and transfer payments.
D) all of the above.

Question 49

Considering only the household sector, if household saving and taxes are less than spending from borrowing and transfers, then injections into the spending stream are:

A) less than leakages, and the level of economic activity will increase.
B) less than leakages, and the level of economic activity will decrease.
C) greater than leakages, and the level of economic activity will increase.
D) greater than leakages, and the level of economic activity will decrease.

Question 50

Considering only the household sector, an economy will:

A) expand as spending from transfers and borrowing, and savings and taxes increase.
B) contract as spending from transfers and borrowing, and savings and taxes increase.
C) expand as spending from transfers and borrowing increases, and contract as savings and taxes increase.
D) contract as spending from transfers and borrowing increases, and expand as savings and taxes increase.

Question 51

An economy will expand when spending from:

A) transfers and borrowing, and saving and taxes all increase.
B) transfers and borrowing, and saving and taxes all decrease.
C) transfers and borrowing increases, and saving and taxes decrease.
D) transfers and borrowing decreases, and savings and taxes increase.

Question 52

An economy will contract when spending from:

A) transfers and borrowing, and savings and taxes increase.
B) transfers and borrowing, and savings and taxes decrease.
C) transfers and borrowing increases, and savings and taxes decrease.
D) transfers and borrowing decreases, and savings and taxes increase.

Question 53

Financial institutions:

A) help channel money from savers to users of funds.
B) are organizations such as banks, insurance companies, and brokerage houses.
C) perform various services for holders of money, stocks, and other financial instruments.
D) all of the above.

Question 54

Which of the following arguments was NOT cited in Up for Debate: Is Saving a Healthy Habit?

A) The stress of everyday life can be lessened by a cushion of savings.
B) Increases in saving by households could kick off a downward spiral in the economy.
C) If people increased their savings levels by 50%, it would lead to economic expansion and a healthier economy.
D) Saving can lead to additional income as interest and dividends are earned on the saving.

Question 55

Spending by businesses on newly produced goods such as machinery, buildings, and the like, is termed:

A) a leakage.
B) production spending.
C) investment spending.
D) business consumption expenditures.

Question 56

The least stable type of spending in the economy is:

A) business investment spending.
B) from government transfer payments.
C) government purchases of goods and services.
D) household personal consumption expenditures.

Question 57

A notable difference between household personal consumption expenditures and business investment spending is that personal consumption expenditures:

A) have increased in recent years, while investment spending remains flat.
B) have fallen in recent years, while investment spending has increased.
C) are relatively stable from year to year, while investment spending fluctuates widely.
D) fluctuate widely from year to year, while investment spending is relatively stable.

Question 58

Investment spending is influenced by:

A) the profit expectations of businesses.
B) the rate of interest on borrowed funds.
C) business expectations as to the overall level of economic activity.
D) all of the above.

Question 59

Investment spending fluctuates from year to year due to changes in:

A) interest rates.
B) profit expectations.
C) expectations of future economic activity.
D) all of the above

Question 60

Business investment spending would likely decrease following an increase in:

A) the interest rate.
B) profit expectations.
C) personal consumption expenditures.
D) all of the above.

Question 61

You would expect the level of investment spending by businesses to increase if:

A) profit expectations decreased.
B) injections into the spending stream decreased.
C) the rate of interest on borrowed funds decreased.
D) the economy moved into the recession phase of the business cycle.

Question 62

Which of the following statements is FALSE?

A) Business spending on capital equipment and buildings is often postponable.
B) The most important determinant of investment spending is expected profit.
C) The amount of borrowing for investment purposes is inversely related to the interest rate.
D) The number of investment opportunities paying high rates of return is greater than the number paying low rates of return.

Question 63

A decrease in interest rates would:

A) have no effect on investment decisions.
B) make investment projects less attractive.
C) make more investment projects attractive.
D) make investment spending as stable as personal consumption expenditures.

Question 64

According to Application 5.1, "Interest Rates and Investment Spending,"the total interest paid on a $200,000 five-year loan at 18 percent is:

A) $36,000.
B) $180,000.
C) less than three times as great as the total interest paid at 6 percent.
D) more than three times as great as the total interest paid at 6 percent.

Question 65

The term retained earnings refers to:

A) earned income withheld by the government.
B) profits held back by a business for investment or other purposes.
C) wages withheld from employees by businesses for Social Security contributions.
D) the unspent earnings of all households, businesses, and government units combined.

Question 66

Business investment spending is:

A) nonincome-determined spending.
B) an injection into the spending stream.
C) channeled through financial institutions.
D) all of the above.

Question 67

Which of the following is a leakage from the spending stream?

A) Business saving and taxes.
B) Business spending from retained earnings.
C) Business investment in replacement parts financed by the sale of stock.
D) All of the above.

Question 68

All other things equal, if business saving is greater than investment spending, then injections into the spending stream are:

A) less than leakages, and the economy will expand.
B) less than leakages, and the economy will contract.
C) greater than leakages, and the economy will expand.
D) greater than leakages, and the economy will contract.

Question 69

All other things equal, if business saving is less than investment spending, then injections into the spending stream are:

A) less than leakages, and the economy will expand.
B) less than leakages, and the economy will contract.
C) greater than leakages, and the economy will expand.
D) greater than leakages, and the economy will contract.

Question 70

All other things equal, which of the following statements is true?

A) An economy will contract when investment is equal to saving.
B) An economy will contract when investment is less than saving.
C) An economy will contract when investment is greater than saving.
D) The relationship between investment and saving has no impact on total economic activity.

Question 71

All else equal, the level of economic activity would most likely increase if household saving:

A) and business investment spending both increased.
B) and business investment spending both decreased.
C) increased, and business investment spending decreased.
D) decreased, and business investment spending increased.

Question 72

If, holding all else equal, the level of household saving decreased and the level of business investment spending increased, the level of economic activity would:

A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease, depending on which change was larger.

Question 73

If, holding all else equal, the level of household saving and the level of business investment spending both increased, the level of economic activity would:

A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease, depending on which change was larger.

Question 74

Considering only household saving and business investment spending, if injections into the spending stream are less than leakages, saving must be:

A) less than investment spending and the economy must be expanding.
B) less than investment spending and the economy must be contracting.
C) greater than investment spending and the economy must be expanding.
D) greater than investment spending and the economy must be contracting.

Question 75

Government purchases of goods and services:

A) are income-determined spending.
B) tend to be less stable than investment expenditures.
C) are the largest component of total, or aggregate, spending.
D) do not include government payments for Social Security and unemployment compensation.

Question 76

The two main categories of government expenditures are:

A) defense expenditures and tax refunds.
B) purchases of goods and purchases of services.
C) purchases of goods and services, and transfer payments.
D) income determined and nonincome-determined spending.

Question 77

Government transfer payments:

A) are income-determined spending.
B) are a leakage from the spending stream.
C) are a direct injection into the spending stream.
D) provide for an injection into the spending stream through households.

Question 78

Which of the following statements is true?

A) Tax payments to the government are leakages from the spending stream.
B) Government purchases of goods and services are direct injections into the spending stream.
C) Transfer payments from government to households are a source of injections into the spending stream.
D) All of the above.

Question 79

All else equal, which of the following statements is true?

A) An economy will contract when government purchases and spending from
Transfers are equal to the amount taken from the spending stream by taxes on businesses and households.
B) An economy will contract when government purchases and spending from transfers are less than the amount taken from the spending stream by taxes on businesses and households.
C) An economy will contract when government purchases and spending from transfers are greater than the amount taken from the spending stream by taxes on businesses and households.
D) The relationship between government purchases and spending from transfers and taxes has no impact on total economic activity.

Question 80

You would expect the level of economic activity to decrease if there were an increase in government:

A) transfer payments.
B) outlays for defense.
C) expenditures on goods and services.
D) taxes on businesses and households.