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ECON 2101 - Principles of Macroeconomics, Test 2

Multiple Choice (2.5)

Indicate the best response that completes the statement or answers the question. Be sure to answer all 40 questions on
your opscan form.

1. If the annual inflation rate is 5 percent a year, about how many years will it take for the price level to double?

a) 10 years
b) 16 years
c) 14 years 70/5
d) 12 years

2. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:

a) 7 percent.
b) 3 percent.
c) 8 percent.
d) 5 percent.

3. Transfer payments such as Social Security or unemployment compensation are counted in the calculation of
GDP.

a) True b) False

4. If real GDP falls from one period to another, we can conclude that:

a) deflation occurred.

b) inflation occurred.

c) nominal GDP fell.

d) None of these necessarily

occurred.

5. Which is included in the expenditures approach to GDP?

a) Spending on meals by consumers at restaurants

b) Spending on used clothing by consumers at garage sales
c) The monetary value of used trucks purchased by construction companies
d) The monetary value of stocks and bonds owned by investors

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6. The value of corporate stocks and bonds traded in a given year is:

a) Excluded from the calculation of GDP because they may include international and domestic transactions.
b) Excluded from the calculation of GDP because they make no contribution to current production of
goods and services
c) Included in the calculation of GDP because they make a contribution to the current production of goods and
services
d) Included in the calculation of gross private domestic investment

7. Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin
plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced
with is:

a) Structural
b) Cyclical
c) Frictional
d) Natural

8. For a nation's real GDP per capita to rise during a year:

a) investment spending must increase.

b) real GDP must increase more rapidly than population.
c) consumption spending must increase.
d) population must increase more rapidly than real GDP.

9. A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in institutions, or
under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the
unemployment rate?

a) 27 percent
b) 4 percent
c) 6 percent 12/200
d) 9 percent

10. A GDP price index one year was 110, and the next year it was 115. What is the approximate percentage change
in the price level from one year to the next as measured by that index?

a) 6.2%
b) 5.0%
c) 3.1%
d) 4.5% (115-110)/110

Answer the question(s) based on the following price and output data over a five-year period for an economy that
produces only one good. Assume that year 2 is the base year.

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11. Refer to the above data. If year 2 is the base year, the price index for year 3 is:

a) 120
b) 125
c) 150
d) 133 (15*4/15*3)

12. Refer to the above data. If year 2 is the base year, then the percentage increase in real GDP from year 2 to year 4
is:

a) 80 percent 18*3=54=Year 4 Real GDP, 10*3=30=Year 2 Real GDP, (54-30)/30 = 80%

b) 40 percent
c) 60 percent
d) 100 percent

13. GDP tends to underestimate the productive activity in the economy because it excludes:

a) The work done by construction companies to build manufacturing plants.

b) Spending by the government on military goods
c) The personal labor time homeowners spend on home repairs
d) Spending by businesses to reduce the level of pollution they produce

14. In calculating GDP, consumption expenditures include:

a) consumer durable goods and consumer nondurable goods, but not services.
b) purchases of both new and used consumer goods.
c) consumer durable goods, consumer nondurable goods, and services.
d) changes in business inventories.

15. GDP data are criticized as being inaccurate measures of economic welfare because:

a) they do not take into account changes in the amount of leisure.

b) they do not take into account all changes in product quality.

c) they do not take into account illegal market transactions.

d) of all of these
considerations.

16. Suppose Smith pays $100 to Jones.

a) We can say with certainty that the GDP has increased, but we cannot determine the amount.
b) We need more information to determine whether GDP has changed.
c) We can say with certainty that the nominal GDP has increased, but we can't say whether real GDP has
increased or decreased.
d) We can say with certainty that the GDP has increased by $100.

17. If a person's nominal income increases by 2% while the price level increases by 6%, the person's real income:

a) Increases by 6%
b) Increases by 2%
c) Decreases by 4%
d) Decreases by 2%

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18. Gross domestic product (GDP) is equal to personal consumption expenditures:

a) Minus gross private domestic investment, plus government purchases, plus net exports
b) Plus gross private domestic investment, plus government purchases, minus net exports
c) Plus gross private domestic investment, minus government purchases, plus net exports
d) Plus gross private domestic investment, plus government purchases, plus net exports

19. The business cycle is best defined as alternating periods of increases and decreases in the level of economic
activity.

a) True b) False

20. Nominal gross domestic product

a) changes only when there is a change in output

b) changes only when net exports increase.
c) can change when there is a change in either output or the price level
d) changes only when there is a change in the price level

21. Assume that in 2002 the nominal GDP was $350 billion and in 2003 it was $375 billion. On the basis of this
information we:

a) cannot make a meaningful comparison of the economy's performance in 2002 relative to 2003.
b) can conclude that real GDP was lower in 2002 than in 2003.
c) can conclude that the economy was achieving real economic growth.
d) can conclude that real GDP was higher in 2002 than in 2003.

22. An example of an intermediate good or service would be:

a) A desk bought by an accountant for her office

b) Bricks bought by a homeowner for constructing a patio
c) A car bought by a stockbroker for commuting to work
d) Sacks of groceries bought by a dentist for his family

23. A recession is a decline in:

a) GDP that lasts one year or longer

b) The natural rate of unemployment
c) GDP that lasts six months or longer
d) The full-employment unemployment rate over a year

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24. Recently a teachers' union argued that the standard of living of teachers working for the school district was falling.
The negotiating team for the school board replied that this was not true because the teachers had received
significant increases in nominal income through collective bargaining. Could the union statement be correct?

a) Yes, because real income may fall if price increases are proportionately greater than the increases in
nominal income
b) No, because real income may rise if price increases are proportionately greater than declines in income
c) No, because real income may rise if price increases are proportionately greater than the increases in nominal
income
d) Yes, because real income may fall if price increases are proportionately smaller than the
increases in nominal income

25. In this current recession, the unemployment rates for men are:

a) Falling rapidly while those for women are rising rapidly

b) Higher than those for women
c) Equal to those for women
d) Lower than those for women

26. Net exports is a positive number when a nation's exports of goods and services exceed its imports.

a) True b) False

27. The business cycle is so named because upswings and downswings in business activity are equal in terms of
duration and intensity.

a) True b) False

28. People who work part time, but desire to work full time, are considered to be officially unemployed.

a) True b) False

29. The natural rate of unemployment:

a) Means that the economy will always operate at its natural rate
b) Means that the economy will always realize its potential output
c) Is equal to the total of frictional and structural unemployment
d) Is a fixed unemployment rate that does not change over time

30. To avoid multiple counting in calculating GDP, only:

a) Final goods and services should be counted

b) Primary, intermediate, and final goods and services should be counted
c) Intermediate goods and services should be counted
d) Both final and intermediate goods and services should be counted

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 (GDP figures are in billions of dollars.)

31. Refer to the above table. What was real GDP in Year 2?

a) $4,875 billion
b) $5,320 billion
c) $4,820 billion
d) $4,911 billion (5,500/1.12)

32. A trough in the business cycle occurs when:

a) Structural and frictional unemployment are at their highest levels

b) Cyclical unemployment is at a minimum point
c) The natural rate of unemployment is at a minimum point
d) Employment and output reach their lowest levels

33. Cost-of-living adjustment clauses (COLAs):

a) invalidate the "rule of 70."

b) tie wage increases to changes in the price level.
c) increase the gap between nominal and real income.
d) apply only to demand-pull inflation.

34. A headline states: "Real GDP falls again as the economy slumps." This condition is most likely to produce what
type of unemployment?

a) Frictional
b) Cyclical
c) Structural
d) Natural

35. Inflation is defined as an increase in prices of all final goods and services produced in an economy.

a) True b) False

36. Official unemployment rate statistics may:

a) Overstate the amount of unemployment by including part-time workers in the calculations

b) Understate the amount of unemployment by excluding part-time workers in the calculations
c) Overstate the amount of unemployment because of the presence of "discouraged" workers who are not
actively seeking employment
d) Understate the amount of unemployment because of the presence of "discouraged" workers who are
not actively seeking employment

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37. Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated inflation occurs
in the economy, then:

a) Lenders are hurt, but borrowers benefit

b) Borrowers are hurt, but lenders benefit
c) Both lenders and borrowers benefit
d) Both lenders and borrowers are hurt

38. The price of the CPI market basket is $8,500 in 2005, $9,250 in 2006, and $10,700 in 2007. Assuming the base
year is 1990, what is the value of the price index in 1990?

a) 116
b) Cannot determine without more information.
c) 224
d) 100

39. If the price index is 130, this means that:

a) Nominal GDP must be inflated to determine the real GDP

b) Prices are .13 times higher than in the base year
c) Prices are 130 percent higher than in the base year
d) Prices are 30 percent higher than in the base year

40. Nancy returns to school to study medicine. After graduating, she spends six months looking for a job. During this
period she is considered:

a) Structurally unemployed.
b) Seasonally unemployed.
c) Cyclically unemployed.
d) Frictionally unemployed.