Deck 4: Introduction to Macroeconomics

Question 1

Today, the vast differences in the living standard between rich and poor countries are mainly the result of:

A) small differences in per capita GDP levels around the world.
B) rich countries experiencing modern economic growth while poor countries do not.
C) small differences in nominal GDP levels around the world.
D) large differences in population levels around the world.

Answer 1

rich countries experiencing modern economic growth while poor countries do not.

Question 2

To facilitate the international comparisons of living standards around the world, adjustments are supposed to be made to each country's GDP. These adjustments require:

A) calculating each country's GDP in terms of U.S. dollar, dividing it by the general price level and, subtracting the previous year's value of the country's GDP from it.
B) converting each country's GDP to U.S. dollars, dividing it by the country's population and, to adjust the resulting figure for the purchasing power parity.
C) each country's GDP should be multiplied by its general price level.
D) there is no need for any adjustments since, each country's GDP is the representative of its standard of living.

Answer 2

converting each country's GDP to U.S. dollars, dividing it by the country's population and, to adjust the resulting figure for the purchasing power parity.

Question 3

Which of the following is not an economic investment?

A) the purchase of machinery by ABC Manufacturing Company
B) the purchase of 50 shares of Aliant by a retired business executive
C) construction of a housing project for the homeless
D) the increase in the inventory on a grocer's shelf

Answer 3

the purchase of 50 shares of Aliant by a retired business executive

Question 4

Inflation means:

A) an increase in individuals' real income.
B) that all prices are rising and at the same rate.
C) an increase in the overall price level.
D) a decrease in the overall level of prices.

Question 5

To look at the health of the economy, economists would most probably look at indictors such as:

A) real GDP, unemployment rate and, the inflation rate.
B) level of saving, nominal GDP and, the inflation rate.
C) nominal GDP, level of investment and, the general price level.
D) the general price level, employment rate and, level of saving.

Question 6

In 2008-2009, the Canadian economy experienced:

A) a depression.
B) the Great Recession.
C) a decrease in the unemployment rate compared to 2007.
D) an increase in jobs.

Question 7

Economic growth is defined as:

A) an increase in either real GDP or real GDP per capita.
B) an increase in the nominal GDP.
C) an increase in the overall general price level.
D) an increase in the level of consumption.

Question 8

Real GDP and nominal GDP differ because real GDP:

A) is adjusted for changes in the nation's distribution of income.
B) includes the economic effects of international trade.
C) is equal to the nominal GDP minus the total tax payments.
D) has been adjusted for changes in the price level.

Question 9

In economics, the term "investment" includes:

A) the purchase of a Microsoft stock.
B) the purchase of gold by a businessman.
C) the addition of cash to a savings account.
D) any increase in business inventories.

Question 10

To keep track of long-run growth and short-run fluctuations, economists will look at statistics such as:

A) interest rate and, stock market prices.
B) stock market prices only.
C) inflation, expected rate of returns on investments.
D) real and nominal GDP, unemployment and inflation rates.

Question 11

Economic growth is best defined as the:

A) increase in consumption level as a percentage of GDP over time.
B) percentage increase in real GDP over time.
C) percentage increase in nominal GDP over time.
D) percentage decrease in the overall price levels over time.

Question 12

Modern economic growth refers to:

A) an increase in the general price level.
B) an increase in output per person.
C) an increase in the output.
D) an increase in percentage of the population which participates in the labour force.

Question 13

If the economy's output and income double in 35 years, we can:

A) not say anything about the average annual rate of growth.
B) conclude that its average annual rate of growth is about 5.5 percent.
C) conclude that its average annual rate of growth is about 2 percent.
D) conclude that its average annual rate of growth is about 4 percent.

Question 14

According to researchers, there is a direct link between unemployment and:

A) major social problems like higher crime rates, higher rate of depression, heart disease and other illnesses.
B) major social problems such as high levels of education and, health services.
C) inflation.
D) characteristics of structural unemployment.

Question 15

Modern economic growth refers to the idea of experiencing:

A) an increase in output per person as compared to an increase in output.
B) an increase in output as compared to an increase in output per person.
C) an increase in population at a faster rate than an increase in output.
D) an increase in population at the same rate as the increase in output.

Question 16

To understand how the economy works, economists could look at various data including:

A) the number of new residential building permits.
B) the amount of new orders for capital goods.
C) the number of manufacturers' new orders for consumer goods.
D) all of the above.

Question 17

The official unemployment rate:

A) reveals people over 21 years of age who are currently discouraged and are not looking for a job.
B) is the percentage of the labour force which is unemployed.
C) is the percentage of the labour force which is working part-time.
D) is the percentage of the total population which is not working.

Question 18

The concept of "real GDP" refers to:

A) the value of nominal GDP after adjustments have been made for changes in the price level.
B) the value of nominal GDP minus the environmental pollution and changes in the distribution of income.
C) the value of the current total output plus the value of intermediate goods.
D) GDP data which reflect changes in both physical output and environmental damage.

Question 19

If current prices are used to calculate the value of total output produced by a country during a specific period of time, the result is called:

A) real GDP.
B) nominal GDP.
C) full employment GDP.
D) constant dollar GDP.

Question 20

The term "inflation" describes the situation where:

A) general price levels are declining.
B) stock market prices are increasing.
C) all prices are increasing at the same rate.
D) the overall price level is increasing.

Question 21

The financial institutions play an important role in transferring the savings of the individuals to the investments by businesses. Which of the following correctly states this transfer?

A) banks collect the savings and invest it in the stock market.
B) banks collect the savings, rewarding the savings by interest and dividend payments and, lend the funds to businesses who in turn buy equipment, factories and capital goods.
C) banks collect the savings and lend the funds to the government who in turn redistribute it through different kinds of subsidies.
D) financial institutions do not have a major role in this process.

Question 22

________ shocks are unexpected changes in the demand for goods and services While, _________ shocks are unexpected changes in the supply of goods and services.

A) supply; demand.
B) investment; savings.
C) internal; external.
D) demand; supply.

Question 23

The above diagram (a) represents the demand for and supply of a brand of automobile (Turbo-car) for a car manufacturing company named Fancy Auto. Assume that D_L represents low demand for the Turbo-car, D_M represents the medium level of demand and, D_H represents the high level of demand for Turbo-car and Fancy Auto's optimal output level is 900 cars per week. If the prices are flexible, Fancy Auto:

A) can continue to sell its optimal output regardless of the demand level.
B) can continue producing its optimal output level only if demand is at D_L level.
C) can continue producing its optimal output level only if demand is at D_M level.
D) can continue producing its optimal output level only if demand is at D_H level.

Question 24

Refer to the above diagram (b), assume that D_L represents low demand for the Turbo-car, D_M represents the medium level of demand and, D_H represents the high level of demand for Turbo-car and, Fancy Auto's optimal output level is 900 cars per week. If the Fancy Auto Company has a fixed price policy of $37,000 per vehicle:

A) the quantity demanded will be 900 cars per week if the demand is D_L.
B) the quantity demanded will be 700 cars per week if the demand is D_L.
C) the quantity demanded will be 1150 cars per week if the demand is D_L.
D) the quantity demanded will be 1150 cars per week if the demand is D_M.

Question 25

The Flamingo Corporation issued $30 million in new common stock in 2008. It used $22 million of the proceeds to replace obsolete equipment in its factory and $8 million to repay bank loans. As a result, investment:

A) of $8 million has occurred.
B) of $22 million has occurred.
C) of $30 million has occurred.
D) has not occurred.

Question 26

The inequality of saving and planned investment:

A) is attributable to a low level of consumption.
B) may be of considerable significance because of the subsequent changes in income, employment, and the price level.
C) is of no consequence because a compensating inequality of tax collections and government spending will always occur.
D) is of no consequence because saving and actual investment will always be equal.

Question 27

Because prices change too slowly in the short-run and as a result, they do not quickly equalize the quantity demanded and quantity supplied of goods and services, the short-run response of the economy to a demand shock is through:

A) changes in output and employment levels rather than through changes in prices.
B) changes in prices rather than through changes in employment.
C) changes in employment but not in output.
D) changes in output but not in the employment.

Question 28

The higher is the current level of saving:

A) the higher is the current level of investment and higher the future level of consumption.
B) the lower is the current level of investment and lower the future level of consumption.
C) the higher is the current level of investment and lower the future level of consumption.
D) the lower is the current level of investment and higher the future level of consumption.

Question 29

Which would be considered an investment according to economists?

A) the buying of shares of Fidelity mutual funds
B) the purchase of a new machinery by McCain Food
C) the selling of Boeing stock by a businessman
D) the selling of GE corporate bonds

Question 30

The short-run fluctuations in output and unemployment that we see in the real world are the result of:

A) shocks and events that are going according to the plans.
B) shocks and events that are not going according to the plans.
C) the actual demand to be exactly what the firms were expecting.
D) the actual supply to be exactly what the firms were planning.

Question 31

Refer to the above diagrams, one can conclude that if expectations are always fulfilled, Fancy Auto Company:

A) will never have to adjust the optimal output and employment levels accordingly.
B) has to adjust the employment level but not the optimal output.
C) has to adjust the optimal output level but not the employment.
D) has to adjust both optimal output level and employment accordingly.

Question 32

When we say "Prices of many goods and services are inflexible in the short-run" it means:

A) prices change too quickly in the short-run.
B) prices do not change in the long-run.
C) prices change too slowly in the short- run.
D) prices are not sticky in the short-run.

Question 33

In response to some unexpected changes in demand:

A) the economy could always adjust its production level if the prices are inflexible.
B) the economy would always produce less than what was expected if the prices of goods and services are inflexible.
C) the economy could always produce at its optimal capacity if the prices of goods and services are inflexible.
D) the economy could always produce at its optimal capacity if the prices of goods and services are fully flexible.

Question 34

Economists believe that most short-run fluctuations are the result of:

A) supply shocks.
B) demand shocks.
C) unexpected changes in the availability of imported resources.
D) negative supply shocks.

Question 35

To explain the short-run fluctuations in the real-world economies, economists refer to:

A) the combination of unexpected changes in demand and inflexible prices.
B) the combination of unexpected changes in demand and flexible prices.
C) the combination of fully expected changes in demand and inflexible prices.
D) the combination of flexible prices and changes in the inventories.

Question 36

Which would be considered an investment according to economists?

A) the purchase of government bonds by the nation's central bank
B) the purchase of a laptop by a university student to prepare her class projects
C) the construction of a new factory by Intel
D) the purchase of shares of stock by Manulife, a mutual fund company

Question 37

Knowing that in the real world, the demand for goods and services could change unexpectedly, firms would attempt to deal with it by:

A) producing different levels of goods and services according to the changes in demand.
B) switching to the production of another product in the short-run.
C) maintaining an inventory.
D) closing down the production in the short-run with the hope that the situation would change in the future.

Question 38

Refer to the above diagram. Curve (a) is the current production possibilities frontier for the economy. Other things being equal, society's current choice of point P on curve (a) means:

A) more rapid economic growth compared to choosing point N.
B) a slower rate of economic growth compared to choosing point N.
C) the same rate of growth as would occur if point N were chosen.
D) it is unachievable because it exceeds the productive capacity of the economy.

Question 39

The decisions about savings and investments are complicated because:

A) it involves uncertainty about the future.
B) higher savings means higher levels of consumption for individuals.
C) the investment decisions are independent from the decisions about savings.
D) savings are taken by businesses while investments are done by households.

Question 40

In response to an unexpected change in demand, if the prices are free to adjust quickly:

A) a firm could always operate at its optimal output level.
B) a firm would experience a decline in its output and employment.
C) a firm would not be able to adjust its output according to the plan.
D) a firm would not be able to change its employment accordingly.

Question 41

Assume that the demand for goods and services falls across the entire economy and for an extended period of time. If the prices are inflexible, the unintended increase in business inventories would force:

A) businesses to keep the production at the existing level.
B) businesses to increase the level of production.
C) businesses to lower the level of production.
D) businesses to increase the level of employment.

Question 42

Which of the following have the most flexible prices?

A) airline tickets, gasoline and, electricity.
B) hair cuts, newspapers and, taxi fares.
C) computer software and, veterinary services.
D) coin-operated laundry machines, restaurant menus and, magazines.

Question 43

A well functioning financial system helps to promote economic growth and stability.
Subtopic: Banks and other financial institutions

Question 44

Unemployment occurs when a person cannot get a job despite being willing to work and actively seeking work.

Question 45

One major difference between the short-run and long-run macroeconomic analysis is that:

A) in the short-run prices are fully flexible while in long-run they are not.
B) in the short-run prices are sticky while in long-run they are fully flexible.
C) in the short-run stickiness of prices would guarantee the long-run price inflexibility.
D) the price stickiness in the long-run guarantees the flexibility of prices in the short-run.

Question 46

In reality, all the prices in the economy are inflexible and are not able to change rapidly when demand changes unexpectedly.
Subtopic: Demand shocks and inflexible prices

Question 47

If the unexpected short-run fluctuations in demand begin to look permanent:

A) the firms would allow their prices to change accordingly.
B) the firms would be hesitant to allow their prices to change accordingly.
C) the firms would not allow their prices to change.
D) the firms would change the quality of their products but not the prices.

Question 48

Modern economic growth in a country implies that output per person increases.

Question 49

Assuming inflexible prices, if the demand for many goods and services falls across the entire economy and for an extended period of time:

A) many firms will face a constant reduction in their inventories.
B) many firms will face with an inventory pile up and will be forced to cut production.
C) many firms will face with an inventory pile up and will be forced to hire more workers.
D) many firms will face a constant reduction in their inventories and will be forced to hire more workers.

Question 50

If prices are flexible, no matter what demand turns out to be, firms can continue selling their optimal output.

Question 51

Sticky prices imply that some firms are afraid to cut their prices because they are afraid of price wars.
Subtopic: How sticky are prices

Question 52

Commodities such as airline tickets, and gasoline have sticky prices.
Subtopic: How sticky are prices

Question 53

Demand shocks are the expected changes in the demand for goods and services.

Question 54

To study macroeconomics, one needs various models with different assumptions about the flexibility and/or stickiness of price levels. This is because:

A) the economy behaves similarly to demand shocks regardless of the length of time.
B) the price flexibility is a short-run phenomenon while, the price stickiness is a long-run phenomenon.
C) the economy behaves so differently depending on how much time has passed after a demand shock.
D) various government policies are useless to eliminate the effects of an unexpected demand shock.

Question 55

Savings are generated when current consumption is less than current output.

Question 56

Gross Domestic Product (GDP) measures the value of final goods and services produced by a nation during a given period of time.

Question 57

Before the start of the Industrial Revolution in the late 1700s, living standards around the world were quite different.

Question 58

Several factors contribute to short-run price stickiness. These include:

A) consumer preference for lower prices and the quality of the product.
B) durability and the quality of the product.
C) frequent sales and, inventory pile ups.
D) consumer preference for predictable prices and, the fear of price war.