Unit Two Test

Vocabulary: Inflation

1. An increase in the Consumer Price Index is commonly referred to as – economic growth.– inflation.– unemployment.– discouraged workers.– deflation

Real = Nominal – inflation -1 = 4 - x

2. If your nominal income rises 4 percent and your real income falls 1 percent, by how much did the price level change? – 5 percent decrease– 1/4 percent increase– 3 percent increase– 3 percent decrease– 5 percent increase

Vocabulary: Discouraged Worker 3. What does the presence of discouraged workers do to the

measurement of the unemployment rate? – Discouraged workers are counted as "out of the labor force," thus

understating the unemployment rate, making the economy look stronger than it is.

– Discouraged workers are counted as "out of the labor force," thus overstating the unemployment rate, making the economy look weaker than it is.

– Discouraged workers are not surveyed so there is no impact on the unemployment rate.

– Discouraged workers are counted as "unemployed," thus understating the unemployment rate, making the economy look stronger than it is.

– Discouraged workers are counted as "unemployed," thus overstating the unemployment rate, making the economy look weaker than it is.

Concept: Economic Growth

4. Which of the following would likely contribute to faster rates of economic growth? – A more restrictive immigration policy.– Negative net investment.– Higher taxes on households and firms.– Higher government funding of research on clean

energy supplies.– Protective trade policies.

Vocabulary: Cyclical Unemployment and NRU

5. When a nation is operating at the natural rate of employment, – there is no cyclical unemployment.– the inflation rate is zero.– there is no structural unemployment.– the nation is experiencing a recession.– the unemployment rate is zero.

Vocabulary: GDP

6. Which of the following transactions would be included in the computation of Gross Domestic Product? A. Josh buys a new pair of running shoes.B. Nancy offers to babysit her granddaughter.C. Katie buys her dad's used car.D. Eli cannot go to a concert so he resells his ticket to a friend.E. Molly rakes the leaves in her own yard.

Unemployment Rate = unemployed/labor force

8. The table above summarizes the local labor market. Based on this information, which of the following is an accurate statement?

• The number of discouraged workers has fallen from 2003 to 2004.

• Although the population has grown, the labor force has remained constant from 2003 to 2004.

• The unemployment rate fell from 33 percent in 2003 to 25 percent in 2004.

• The economic recession in 2003 worsened in 2004.• The unemployment rate fell from 25 percent in 2003 to 20

percent in 2004.

GDP = C + I + G + (X-M)9. Suppose that the federal government reclassified

the purchase of a new home as consumption spending rather than investment spending. This decision would

• increase aggregate demand and decrease real GDP.• decrease aggregate demand and decrease real GDP.• decrease aggregate demand and increase real GDP.• increase aggregate demand and increase real GDP.• have no impact on aggregate demand and real

GDP.

Vocabulary: GDP Deflator

10. Which of the following best measures changes in the price level of national product?

• The consumer price index.• The real interest rate.• The unemployment rate.• The producer price index.• The GDP deflator.

Vocabulary: Scarcity + Opportunity Cost

11. Which of the following scenarios best describes the concepts of scarcity and opportunity cost? ®

• As a birthday present, your cousin sends you a $20 bill.• Your state government, in order to increase support for higher

education, must increase the sales tax to keep the budget balanced.

• Your state government, in order to increase support for higher education, must cut spending for environmental protection to keep the budget balanced.

• The local fire department conducts a raffle to raise funds for new equipment.

• Smoke from a forest fire impairs air quality in a small mountain town.

Model: Circular Flow

• 13. Which of the following is true of the complete circular flow model of an open economy?

• All goods and services flow through the government in exchange for resource payments.

• There is no role for the foreign sector.• Households supply resources to producers in exchange

for goods and services.• Producers provide goods and services to households in

exchange for the costs of production.• The government collects taxes from firms and

households in exchange for goods and services.

Real = Nominal – inflation 4 = 11 - 7

14. If, in a specified year, your nominal GDP grew by 11 percent and real GDP grew by 4 percent, inflation for this year would beA. -7%B. 7%C. 8%D. 11%E. 15%

Vocabulary: Structural Unemployment

• 15. Which of the following is an example of structural unemployment?

• A. A computer programmer who leaves her job to move to Florida.

• B. A worker who loses his job due to a recession.• C. An autoworker whose plant shuts down on

account of decreased wages across the economy. • D. A manufacturer whose job was sent to China.• E. A robot machinist.

Concept: Opportunity cost and trade

• 16. Suppose two countries are each capable of individually producing two given commodities. Instead, each specializes by producing the commodity for which it has the comparative advantage and then trades with the other country. Which of the following is likely to result? ®

• A. The two countries will become more independent of each other.B. Unemployment will increase in one country and decrease in the other. C. There will be more efficient production in one country but less efficient production in the other.

• D. Both countries will be better off. • E. Both countries will be producing their commodity inefficiently.

Vocabulary: Frictional Unemployment

17. Frictional unemployment is• A. associated with a general downturn in the

economyB. the same as structural unemployment

• C. present in any dynamic economy• D. long-term unemployment• E. associated with a long-term decline of specific

industries

Vocabulary: Employment, Unemployment, and Labor Force

18. The top government officials claim that more people are working now more than ever before, which of the following must be true?

• A. The unemployment rate is lower than ever before• B. The number of people employed is higher than

ever before.• C. The employment rate is higher than ever before.• D. The number of people in the labor force is higher

than ever.• E. The number of people unemployed is lower than

ever.

Concept: GDP per capita

19. Declining population in an economy • A. may increase economic growth.• B. may cause lower living standards,

even if GDP increases• C. could contribute to higher real GDP

per capita• D. increases the rate of savings in an

economy• E. increases real GDP

Vocabulary: Cyclical Unemployment

20. Full employment indicates a zero percent• A. cyclical unemployment rate• B. frictional unemployment rate• C. structural unemployment rare• D. seasonal unemployment rate• E. all of the above

Real GDP = Nominal/deflator x 100

• 21. If the nominal GDP is 10 trillion dollars and the GDP deflator is .9, the real GDP is approximately

• A. 9 trillion• B. 11.1 trillion• C. 1 trillion• D. 9.9 trillion• E. 10.9 trillion

GDP = C + I + G + (X-M)

22. The GDP for this country is• A. $38• B. $25• C. $28• D. $22• E. $31

Real = Nominal - IR

• 23. If the nominal interest rate is 12 percent and the inflation rate is 7 percent, the real interest rate is

• A. 12 percent• B. 19 percent• C. 5 percent• D. 7 percent• E. 10 percent

Deflator = Price current year/Price base year x 100

Real = Nominal/Deflator x 10024. Suppose that the country of Samiam produces only eggs and ham. In

2002, it produced 100 units of eggs at $3 each and 50 units of Ham at $4 each. In 2001, the base year, eggs sold for $1.50 per unit and ham for $5.

• A. Nominal 2002 GDP is $500, real 2002 GDP is 400, and the GDP deflator is 80.

• B. Nominal 2002 GDP is $500, real 2002 GDP is 400, and the GDP deflator is 125.

• C. Nominal 2002 GDP is $400, real 2002 GDP is 400, and the GDP deflator is 100.

• D. Nominal 2002 GDP is $400, real 2002 GDP is 500, and the GDP deflator is 25.

• E. Nominal 2002 GDP is $400, real 2002 GDP is 600, and the GDP deflator is 80.

Concept: GNP

25. Which of the following is not included in the United States GNP?

• A. An American-owned bakery is College Park.

• B. An American-owned bakery in Oslo.• C. A Vietnamese-owned donut shop in

Orlando.• D. An American business owner in Fiji.• E. A Florida-owned surf company in Prague.

Components of GDP26. After the terrorist attack on 9/11, governments raised

expenditures to increase security at airports. These purchases of goods and services are

• A. not included in GDP since they are not productive. • B. not included in GDP since the government will have

to raise taxes to pay for them.• C. not included because they are not accounted for in

the circular flow.• D. included in GDP since government expenditures are

included in GDP. • E. included in GDP only to the extent that the Federal

government, not local and state, pay for them.

Components of GDP

27. Which of the following is the largest component of the expenditure calculation of GDP?

• A. Investment• B. Government spending• C. Consumption• D. Exports• E. Imports

Real GDP = Nominal/Deflator x 100

28. If a small country has a current nominal GDP of 20 billion and a GDP deflator of 50, what is the real GDP?

• A. $100 billion• B. $40 billion• C. $10 billion• D. $14 billion• E. $ 22 billion

Real = Nominal/deflator x 100GDP per capita = real/population

• 29. Suppose that 25 years ago a country had a nominal GDP of 1000, a GDP deflator of 200, and a population of 100. Today, they have a nominal GDP of 3000, a GDP deflator of 400, and a population of 150. What happened to the real GDP per capita?

• A. It more than doubled• B. It rose, but less than double.• C. It was unchanged.• D. It fell by 50%• E. It dropped by more than 70%

Vocabulary: Inflation

• 30. When the overall level of prices in an economy increases, this is

• A. deflation• B. stagflation• C. inflation• D. unemployment• E. economic growth

Concept: CPI

• 31. In the CPI, which of the following is weighted most heavily in the U.S.?

• A. Food and beverages• B. Housing• C. Transportation• D. Healthcare• E. Clothes

IR = CPI Year 2 – CPI Year 1/CPI Year 1 x 100

32. If the CPI in year 1 is 50 and the CPI in year 2 is 70, what is the inflation rate?

• A. 4%• B. 14%• C. 40%• D. 20%• E. 50%

IR = CPI Year 2 – CPI Year 1/CPI Year 1 x 100

• 33. Which change in the price index shows the greatest rate of inflation: 80 to 100, 100 to 120, 150 to 170, or 180 to 200?

• A. 80 to 100• B. 100 to 120• C. 150 to 170• D. 180 to 200• E. They are all the same

100 x 1969 CPI/today CPI100 x 100/400

• 34. Suppose the CPI is currently 400 and was 100 in 1969. Then, according to the CPI, $100 today purchases the same amount of goods and services as

• A. $25 in 1969• B. $40 in 1969• C. $45 in 1969• D. $60 in 1969• E. $75 in 1969

Real IR = Nominal IR – inflation • 35. Which is the most accurate statement about the

relationship between the inflation and interest rates:• A. There is not a relationship.• B. They are the same thing.• C. The interest rate is determined by the rate of

inflation.• D. In order to fully understand inflation, we need to

know how to correct for the effects of interest rates.

• E. In order to fully understand interest rates, we need to know how to correct for the effects of inflation.

Real IR = Nominal IR – inflation

36. If the nominal interest rate is 8 percent and the rate of inflation is 2 percent, what is the real interest rate?

• A. 16%• B. 10%• C. 6%• D. 3%• E. 4%

Vocabulary: Labor Force

37. The labor force equals• A. All citizens who are employed• B. All citizens who are employed and

unemployed• C. All citizens between 16 and 64• D. All citizens between 16 and 64 who are

employed• E. All citizens between 16 and 64 who are

employed and unemployed

Vocabulary: unemployed

• 38. Who would not be considered to be a part of the labor force?

• A. An unemployed plumber• B. A working nurse• C. A stay at home mom• D. A college grad looking for a job• E. A part-time taxi driver

LFPR = labor force/adult pop x 100

39. The LFPR is defined as• A. (Employed /Adult Population) x 100• B. (Employed/Labor Force) x 100• C. (Labor Force/Adult Population) x 100• D. (Adult Population/Labor Force) x 100• E. (Unemployed/Labor Force) x 100

Vocabulary: LFPR

• 40. Rick loses his job and immediately begins looking for another. Ceteris Paribus, the unemployment rate

• A. decreases and the LFPR is unaffected. • B. increases and the LFPR is unaffected.• C. decreases and the LFPR decreases.• D. increases and LFPR decreases.• E. None of the above

Vocabulary: NRU and Cyclical Unemployment

• 41. The NRU for Appleofmyeye is 8 percent. Currently, this nice nation has a 12 percent unemployment rate. What is most likely true?

• A. The country is going through an expansionary phases.

• B. 4% are structurally unemployed.• C. 12 % are cyclically unemployed.• D. 4% are cyclically unemployed. • E. 8% are cyclically and frictionally unemployed.

Government Intervention

• 42. To address cyclical unemployment, which of the following would not be used?

• A. Tax cuts• B. Increase government spending• C. Lowering interest rates• D. Depreciate the nation’s currency• E. Tax hikes to pay for spending

6 costs of inflation

• 43. Which of the following is a cost of inflation?

• A. Loanable funds• B. Menu Costs • C. Shoe Costs• D. Unemployment• E. Mental illness

Costs of Inflation

• 45. Which of the following is one unexpected cost of inflation?

• A. Redistribution of wealth• B. Training programs• C. Brain drain• D. High interest rates• E. Decrease in CPI