Exam Questions Macroeconomics The Big Picture Chapter 5

Chapter 5: Macroeconomics: The Big Picture

Multiple Choice

1. What is a sub-prime mortgage?

A) It is a mortgage loan offered at an interest rate below the prime lending rate.

B) It is a mortgage 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 excellent credit score earns the buyer a preferential interest rate.

Difficulty: Easy

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

A) net national product.

B) gross foreign factor output.

C) gross personal product.

D) gross domestic product.

Difficulty: Easy

3. Consider a bakery that buys flour to bake cakes. Which of the following statements is true?

A) The value of the cake and the flour used to make the cake are counted as part of GDP.

B) Only the value of the cake is counted in GDP.

C) Only the value of the flour used to make the cake is counted in GDP.

D) Only the difference between the value of the cake and the value of the flour is counted in GDP.

Difficulty: Medium

4. To best determine whether an economy’s output is growing or shrinking, one must keep track of changes in:

A) nominal GDP.

B) the growth rate of nominal GDP.

C) the general price level.

D) real GDP.

Difficulty: Medium

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

A) indexed dollars.

B) deflated dollars.

C) nominal dollars.

D) real dollars.

Difficulty: Medium

6. 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.

Difficulty: Easy

7. Suppose nominal GDP in a country 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) The economy’s price level declined over the second and third quarters of 2008.

B) The general price level in the economy in the third quarter is higher than that in the second quarter of 2008.

C) Production of goods must have increased by a greater rate than the increase in the economy’s price level.

D) The population of the country must have increased over the last quarter.

Difficulty: Medium

8. 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 another expansion.

C) It is the seasonal pattern of fluctuations in consumer spending: increased spending during the holiday season and decreased spending at other times of the year.

D) It refers to the peaks and troughs in the demand for luxury goods in a country.

Difficulty: Easy

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

A) trough.

B) downturn.

C) peak.

D) lag.

Difficulty: Easy

10. 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 recession to the next recession.

Difficulty: Easy

11. The peak of the business cycle:

A) usually occurs when the natural rate of unemployment is equal to its actual rate.

B) is the minimum level of nominal GDP.

C) is the point where an expansion ends and a recession begins.

D) usually occurs immediately before the expansion phase.

Difficulty: Easy

12. The trough of the business cycle:

A) comes right after the expansion phase.

B) comes before the recession phase.

C) occurs when the actual rate of unemployment in the economy is zero.

D) is the point where a recession ends and an expansion begins.

Difficulty: Easy

13. A sustained period of rising real GDP is called a(n):

A) peak.

B) trough.

C) expansion.

D) recession.

Difficulty: Easy

14. A sustained period of falling real GDP is a(n)

A) peak.

B) trough.

C) expansion.

D) recession.

Difficulty: Easy

Use the following to answer questions 15-17.

Exhibit: Real GDP Over Time

15. (Exhibit: Real GDP Over Time) 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.

Difficulty: Medium

16. (Exhibit: Real GDP Over Time) The trough of the business cycle occurs:

A) between t₁ and t₂.

B) at t₁.

C) between t₂ and t₃.

D) at t₂.

Difficulty: Medium

17. (Exhibit: Real GDP Over Time). The peak of the business cycle occurs:

A) between t₁ and t₃.

B) at t₃.

C) between t₂ and t₃.

D) at t₂.

Difficulty: Medium

18. The point on a business cycle where real GDP stops rising and begins falling is called a(n):

A) peak.

B) trough.

C) expansion.

D) recession.

Difficulty: Easy

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

A) trough.

B) recession.

C) peak.

D) expansion.

Difficulty: Easy

20. Which of the following statements is NOT true?

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) A complete business cycle is defined by the passage from one peak to the next.

Difficulty: Medium

21. The logical sequence of the phases of a business cycle is:

A) peak, trough, expansion, recession.

B) peak, expansion, trough, recession.

C) peak, recession, trough, expansion.

D) peak, expansion, recession, trough.

Difficulty: Easy

22. Over time, _____ has/have been the general trend for most economies.

A) constant real GDP

B) rising real GDP

C) falling real GDP and a rising price level

D) constant nominal GDP and a falling price level

Difficulty: Easy

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

A) uses data on nominal GDP for two consecutive quarters.

B) uses a range of indicators including real GDP, employment and income.

C) identifies declining economic activity solely based on a fall in real GDP.

D) uses a procedure that determines the dates of peaks and troughs mainly on the basis of employment.

Difficulty: Easy

Use the following to answer questions 24-26.

Exhibit Real GDP and Employment

24. (Exhibit: Real GDP and Employment) The exhibit shows data on real GDP and employment for a particular country from the year 1991 to 2000. The peak(s) in economic activity occurred:

A) once in the ten-year period, in 1999.

B) twice in the ten-year period, in 1998 and in 1999.

C) once in the ten-year period, in 1994.

D) twice in the ten-year period, in 1994 and in 1999.

Difficulty: Medium

25. (Exhibit: Real GDP and Employment) The exhibit shows data on real GDP and employment for a particular country from the year 1991 to 2000. The trough(s) in economic activity occurred:

A) once in the ten-year period, in 1996.

B) twice in the ten-year period, in 1996 and in 2000.

C) once in the ten-year period, in 1991.

D) thrice in the ten-year period, in 1991, in 1996, and in 2000.

Difficulty: Medium

26. (Exhibit: Real GDP and Employment) The exhibit shows data on real GDP and employment for a particular country from the year 1991 to 2000. A complete business cycle:

A) commenced in 1994 and ended in 1997.

B) commenced in 1991 and ended in 1994.

C) commenced in 1994 and ended in 1999.

D) commenced in 1991 and ended in 1996.

Difficulty: Medium

27. The terms inflation and deflation refer to changes in:

A) the average level of prices.

B) the average output level.

C) the prices of goods supplied by the government.

D) the prices in black markets.

Difficulty: Easy

28. Which of the following statements is true of inflation?

A) It refers to a decrease in the general price level in an economy.

B) It refers to a rise in the price level of gasoline.

C) It refers to a constant general price level in an economy.

D) It refers to an increase in the average level of prices.

Difficulty: Easy

29. Which of the following would be defined as inflation?

A) An increase in medical care costs

B) A rise in the price of real estates

C) An increase in the market interest rate

D) An increase in the average level of prices

Difficulty: Easy

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.

Difficulty: Easy

31. 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.

Difficulty: Medium

32. Assuming a constant level of nominal income, the real income of an individual rises:

A) during an inflationary phase in the economy.

B) when deflation occurs in the economy.

C) if hyperinflation takes place.

D) with a rise in natural rate of unemployment.

Difficulty: Medium

33. Which of the following individuals benefits from inflation?

A) Ben, who borrowed $1,000 from a friend and agreed to pay the same amount one year later

B) Mark, who lent his friend $1,000 and agreed to accept repayment of the same amount one year later

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

Difficulty: Medium

34. What is hyperinflation?

A) Hyperinflation refers to an inflation rate in excess of 200 percent per year.

B) Hyperinflation occurs when the government of a country sells a large number of bonds.

C) It refers to a situation where a country’s money supply is no longer backed by gold.

D) Hyperinflation arises due to a fall in the money supply.

Difficulty: Easy

35. Which of the following is true of unanticipated inflation?

A) It hurts lenders because the purchasing power of the money they collect from their borrowers is now higher.

B) It hurts borrowers because they repay their debts with money that is now worth more.

C) It helps lenders because the purchasing power of the money they collect from their borrowers is now higher.

D) It helps borrowers because they repay their debts with money that is now worth less.

Difficulty: Medium

36. 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.

Difficulty: Medium

37. Which of the following is NOT a consequence of unanticipated inflation?

A) It increases the purchasing power of money.

B) It reduces the value of future obligations.

C) It increases uncertainty about the future.

D) It reduces the incentives of firms to undertake investments.

Difficulty: Medium

38. A(n) _____ shows the movement in the average level of prices.

A) interest rate

B) GDP growth rate

C) price index

D) natural rate of unemployment

Difficulty: Easy

39. Real GDP is multiplied by _____ to get nominal GDP.

A) the quantity of money supply

B) the price index

C) the exchange rate

D) the nominal interest rate

Difficulty: Easy

40. An indexed payment is a payment for which:

A) the nominal value does not change with the rate of change in the price level.

B) the nominal value is constant.

C) the nominal value changes with the rate of change in the price level.

D) the nominal value is equal to the real value, when inflation is positive.

Difficulty: Medium

41. 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 inflation.

C) It means that the value of his Social Security payments is not adjusted for changes in the price level so his purchasing power may fall.

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.

Difficulty: Medium

42. Which of the following is NOT true of price indexes?

A) They show changes in the general level of prices.

B) They are used to estimate the rate of inflation or deflation.

C) They are used to convert nominal values to real values, so comparisons can be made across time.

D) They are used to compute the growth rate of real output in the economy.

Difficulty: Easy

43. The costs of the market basket in the current period will be compared against the costs of the market basket in _____ when computing a price index.

A) the expansion period

B) the recession period

C) the adjustment period

D) the base period

Difficulty: Easy

44. 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 × 100.

C) (base-period cost of basket ÷ current cost of basket) × current nominal value of basket.

D) percentage change in current cost of basket ÷ percentage change in base-period cost of basket.

Difficulty: Easy

45. 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

Difficulty: Hard

46. 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

Difficulty: Hard

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 of the base year was 128 percent less than that in 2007.

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

Difficulty: Medium

Use the following to answer questions 48-50.

Exhibit: Market Basket for a Typical College Student

48. (Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2007. What is the value of the price index in 2007?

A) 0.88

B) 1.00

C) 1.14

D) 3.42

Difficulty: Medium

49. (Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2007. What is the value of the price index in 2008?

A) 0.88

B) 1.14

C) 3.42

D) 3.90

Difficulty: Hard

50. (Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2008. What is the value of the price index in 2007?

A) 0.88

B) 1.14

C) 3.42

D) 3.90

Difficulty: Hard

51. The consumer price index (CPI) 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 firms.

C) the median annual expenditures of a typical single family of four on consumer goods.

D) the average price of all goods and services computed from the ratio of nominal GDP to real GDP.

Difficulty: Easy

52. When the media reports 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.

Difficulty: Easy

53. The Consumer Price Index is NOT used:

A) to determine the purchasing power of people’s nominal incomes.

B) to measure changes in the cost of living.

C) to measure the average price level of all final goods and services produced.

D) to compute the U.S. inflation rate.

Difficulty: Easy

54. Which of the following is the most broad-based price index available?

A) The consumer price index

B) The producer price index

C) The implicit price deflator

D) The personal consumption expenditures price index

Difficulty: Easy

55. The market basket used for 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) all final and intermediate goods and services produced in that period.

C) all intermediate goods produced in that period.

Difficulty: Easy

56. 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.

Difficulty: Easy

57. Suppose in 2007, nominal GDP in a country Clarendon was $12,840 billion and real GDP was $10,560 billion. Calculate the value of the implicit price deflator, in the way such numbers are normally published.

A) 21.59

B) 82.24

C) 121.59

D) 177.57

Difficulty: Hard

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

A) $6,796 billion

B) $5,714 billion

C) $8,276 billion

D) $6,238 billion

Difficulty: Hard

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

A) $8,860 billion

B) $15,880 billion

C) $12,140 billion

D) $17,360 billion

Difficulty: Hard

60. Which of the following statements is true?

A) The CPI can be accurately computed using two different baskets of goods across two different periods.

B) The implicit price deflator is computed using a fixed basket of certain consumer goods.

C) The CPI and the implicit price deflator can be used to calculate inflation.

D) The CPI is computed using the value of nominal GDP.

Difficulty: Medium

Use the following to answer question 61.

Exhibit: Price and Output Data for a Small Nation

61. (Exhibit: Price and Output Data for a Small Nation) Consider 2003 as the base period. What is the value of nominal output in 2003?

A) $100,000

B) $500,000

C) $125,000

D) $200,000

Difficulty: Medium

Use the following to answer questions 62-63.

Exhibit: Price and Output Data for an Economy

62. (Exhibit: Price and Output Data for an Economy) Assume that 1994 is the base period. In _____, nominal GDP increased over the previous year due to an increase in output and not due to a change in prices.

A) 1996

B) 1999

C) 1998

D) 1995 and 1999

Difficulty: Hard

63. (Exhibit: Price and Output Data for an Economy) Assume that 1994 is the base period. In _____, nominal GDP increased over the previous year due to an increase in prices and not due to a change in output.

A) 1996

B) 1999

C) 1995, 1997, and 1999

D) 1998

Difficulty: Hard

64. 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 these items account for a significant portion of the typical consumer’s expenditures.

C) excludes non-durable goods and services since their consumption value decreases over time.

D) excludes prices for most components of personal consumption expenditures.

Difficulty: Easy

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

A) The rate of inflation for that year is 4 percent.

B) The level of consumer demand is higher in that year as compared to the previous year.

C) The average unemployment level has increased.

D) The output of the economy has fallen by 4 percent in that year.

Difficulty: Medium

66. The inflation rate in the year 2007 is defined as:

A) the ratio of the nominal GDP in 2007 and the nominal GDP in 2006.

B) the percentage of change between the price index in 2007 and the price index in 2006.

C) the difference between the value of the price index in 2007 and the value of the price index in 2006.

D) the ratio of the 2007 price index and 2006 price index.

Difficulty: Medium

67. 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%

Difficulty: Medium

68. If the consumer price index falls from 140 to 135 in a year, what is the deflation rate?

A) 5.00%

B) 3.57%

C) 9.25%

D) 10.37%

Difficulty: Medium

Use the following to answer questions 69-71.

Exhibit: Consumer Price Index for a City

69. (Exhibit: Consumer Price Index for a City) The base year is 2002. What is the inflation rate in 2005?

A) 5%

B) 20%

C) 25%

D) 50%

Difficulty: Medium

70. (Exhibit: Consumer Price Index for a City) The base year is 2002. What is the inflation rate in 2004?

A) 20.8%

B) 22%

C) 31.5%

D) 30%

Difficulty: Medium

71. (Exhibit: Consumer Price Index for a City) The base year is 2002. Which of the following statements is true?

A) The rate of inflation was highest in 2005 as compared to 2004 prices.

B) Inflation in 2005 compared to 2004 prices was more than that in 2002 compared to 2001 prices.

C) The deflation rate was 5% in the year 2005.

D) The inflation rate fell between 2004 and 2005.

Difficulty: Hard

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

A) A nominal value is measured in monetary units adjusted for inflation, unlike a real value.

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.

Difficulty: Easy

Use the following to answer questions 73-75.

Exhibit: Nominal and Real Income

73. (Exhibit: Nominal and Real Income) Calculate the real income for an assistant professor in 1967.

A) $2,381

B) $9,524

C) $10,000

D) $42,000

Difficulty: Medium

74. (Exhibit: Nominal and Real Income) Calculate the approximate value of real income for an assistant professor in 1997.

A) $9,524

B) $9,375

C) $40,000

D) $42,000

Difficulty: Medium

75. (Exhibit: Nominal and Real Income) What has happened to an assistant professor’s salary between 1967 and 1997?

A) Although the nominal salary increased 4-fold in the 30-year period, real salary increased by only 3.2 times.

B) The purchasing power of an assistant professor’s salary has fallen by about 4.76%.

C) The purchasing power of an assistant professor’s salary has increased by about 5.24%.

D) The real salary in 1997 is slightly higher than that in 1967.

Difficulty: Medium

Use the following to answer questions 76-79.

Exhibit: Mechanics Hourly Wage and Price Indexes for 1975 and 2005

76. (Exhibit: Mechanics Hourly Wage and Price Indexes for 1975 and 2005) Calculate a mechanic’s real wage in 1975.

A) $25

B) $30

C) $31.2

D) $36

Difficulty: Medium

77. (Exhibit: Mechanics Hourly Wage and Price Indexes for 1975 and 2005) Calculate a mechanic’s real wage in 2005.

A) $26.25

B) $40

C) $70

D) $100.80

Difficulty: Medium

78. (Exhibit: Mechanics Hourly Wage and Price Indexes for 1975 and 2005) What has happened to a mechanic’s real hourly wage between 1975 and 2005?

A) It rose by 180%.

B) It fell by 18%.

C) It rose by 5%.

D) It fell by about 64%.

Difficulty: Hard

79. (Exhibit: Mechanics Hourly Wage and Price Indexes for 1975 and 2005) Which of the following statements is true?

A) Although the nominal wage increased, the real wage fell.

B) Both the nominal and the real wage rose.

C) Based on the values of the price index, real hourly wage doubled over the 30-year period.

D) The purchasing power of the mechanic has slowly diminished over the years.

Difficulty: Medium

80. Price indexes that employ fixed market baskets:

A) incorporate responses to changing relative prices.

B) do not incorporate responses to changing relative prices.

C) are the only way to measure inflation.

D) cannot be used to measure inflation.

Difficulty: Medium

81. Which of the following is true of a price index that uses a fixed market basket?

A) It accurately predicts the impact of rising prices when purchases are made at superstores.

B) It overstates the importance of items that fall in price.

C) It takes into account changes in quality while computing price changes.

D) It excludes new goods and services.

Difficulty: Medium

82. 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?

A) It leads to the payment of lower nominal benefits than would be the case if the index accurately measures inflation.

B) It raises the government’s revenue earnings through Social Security taxes.

C) It allows retirees to keep their purchasing power constant.

D) It raises government expenditure on programs such as Social Security.

Difficulty: Medium

83. The substitution bias in the construction of the CPI arises because:

A) consumers alter their buying habits as new products come into being and lifestyles change.

B) technological changes have led to improvements in quality and lower production costs over time.

C) consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives.

D) consumers shop at both high-priced department stores and lower-priced discount stores.

Difficulty: Easy

84. 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 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 at Metro-Foods because she values their excellent customer service.

Difficulty: Medium

85. 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) newer versions of a product might be more expensive but could also be better than the older version.

D) consumers also shop at superstores or outlet stores.

Difficulty: Medium

86. Since late 2006, OPEC has successfully raised world oil prices significantly. These price increases have caused governments and firms 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) Both substitution bias and new-product bias

B) Quality-change bias

C) Both quality-change bias and outlet bias

D) Both income bias and substitution bias

Difficulty: Medium

87. 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.

Difficulty: Medium

88. In the Case in Point titled “Take Me Out to the Ball Game . . .”, the average price of the baseball fan market basket (based on the cost of the basket for 30 major league baseball teams) was $219.53 in 2016. The cost of attending a Boston Red Sox game was $360.66 in 2016. 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) 0.58

B) 1.70

C) 1.64

D) 4.01

Difficulty: Medium

89. Based on the Case in Point titled “Take Me Out to the Ball Game . . .”, suppose the average price of the baseball fan market basket was $121.36 in 1998, compared to $219.53 (for the same basket) in 2016. Calculate the inflation rate experienced by a typical baseball fan over this period.

A) 16.88%

B) 38.51%

C) 80.89%

D) 71.03%

Difficulty: Medium

90. 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) not considered a part of the working-age population.

D) not a member of the labor force.

Difficulty: Easy

91. The total labor force comprises:

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.

Difficulty: Easy

92. An unemployed person is:

A) one who is eligible to work but chooses not to work.

B) one who is physically disabled and is unable to work.

C) a person without a job who is actively seeking and available for work.

D) a person who is looking for a job that better suits his qualifications than his current job.

Difficulty: Easy

93. 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 has been temporary laid off 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

Difficulty: Easy

94. A newspaper article recently stated that there are 45.06 million people over the age of 16 who have completed college education. Of this number, 36.21 million are in the labor force and 35.44 million are employed. What is the unemployment rate for this group of people above the age of 16?

A) 2.44%

B) 2.17%

C) 2.13%

D) 1.71%

Difficulty: Hard

95. If the population of the United States is 260 million, the labor force is 130 million, and 120 million workers are employed, the rate of unemployment is _____.

A) 7.69%

B) 8.37%

C) 3.85%

D) 53.84%

Difficulty: Medium

96. Consider the following scenario: In January, 8 million people were seeking jobs but did not succeed. In February, 2 million of these people gave up and stopped looking for work. Holding all else constant, what happened to the unemployment rate in February?

A) It increased.

B) It decreased.

C) It did not change.

D) The change in the unemployment rate will depend on the number of people aged 16 and above.

Difficulty: Hard

97. Consider the following scenario. In March 2006, 40,000 people are employed, 10,000 people are actively looking for work, and 30,000 people are neither working nor looking for work. In April, 12,000 of the 30,000 people who were not looking for work begin their job search. Holding all else constant, the unemployment rate in April will rise to _____.

A) 35.48%

B) 27.52%

C) 19.46%

D) 15.00%

Difficulty: Hard

Exhibit: Employment Data for an Economy

98. (Exhibit: Employment Data for an Economy) Calculate the unemployment rate in the economy.

A) 7.01%

B) 5.16%

C) 4.90%

D) 7.53%

Difficulty: Hard

99. (Exhibit: Employment Data for an Economy) Now suppose 4,000 of the people looking for work get discouraged and give up their job searches. The unemployment rate becomes _____.

A) 6.35%

B) 5.97%

C) 5.91%

D) 2.92%

Difficulty: Hard

100. The natural rate of unemployment:

A) reduces during recessions.

B) is the same as cyclical unemployment.

C) includes frictional and structural unemployment.

D) is the level where the quantity of labor demanded is more than the quantity of labor supplied.

Difficulty: Easy

101. The natural rate of unemployment:

A) is generally fixed for most countries.

B) is affected by demographic changes.

C) usually decreases over time.

D) is determined solely by business cycles.

Difficulty: Easy

102. Which of the following would tend to increase the natural rate of unemployment?

A) An increase in the average level of education

B) A demographic “bulge” of new entrants into the labor force

C) A lower rate of inflation

D) A lower level of expenditure on unemployment benefits

Difficulty: Medium

103. If a nation liberalizes its immigration laws and receives a significant influx of young workers:

A) the natural rate of unemployment is likely to increase.

B) the natural rate of unemployment is likely to decrease.

C) the natural rate of unemployment is unlikely to change.

D) frictional unemployment is likely to decrease.

Difficulty: Medium

104. A country’s frictional unemployment rate is 3%, the natural unemployment rate is 5.5%, and the cyclical unemployment rate is 2.4%. The structural unemployment rate is _____ and the unemployment rate is _____.

A) 3%; 7.9%

B) 2.5%; 7.9%

C) 2.5%; 5.4%

D) 2.4%; 5.4%

Difficulty: Hard

105.A country’s structural unemployment rate is 3.2%, the natural unemployment rate is 5.6%, and the cyclical unemployment rate is 4.7%. The frictional unemployment rate is _____ and the unemployment rate is _____.

A) 2.4%; 5.6%

B) 2.4%; 10.3%

C) 5.6%; 13.5%

D) 7.9%; 12.6%

Difficulty: Hard

106. The economy in a particular country is booming. Real GDP is growing at a rate of 6% per year, well above the average growth rate. Under these circumstances, which of the following types of unemployment is most likely to be the lowest?

A) Frictional unemployment

B) Cyclical unemployment

C) Structural unemployment

D) Involuntary unemployment

Difficulty: Medium

107. Which of the following is a source of frictional unemployment?

A) A downturn in economic activity

B) Low costs of acquiring information about job vacancies

C) The time it takes to search for jobs that best matches one’s skills

D) Outsourcing

Difficulty: Easy

108. Unemployment that results from a mismatch between worker qualifications and the characteristics employers require is called _____ unemployment.

A) cyclical

B) frictional

C) natural

D) structural

Difficulty: Easy

109. Which of the following is true of cyclical unemployment?

A) It occurs even when an economy is producing at a point on its production possibilities frontier.

B) It occurs only during a recession.

C) It tends to occur when an economy experiences inflation.

D) It is a part of the natural rate of unemployment in an economy.

Difficulty: Easy

110. Workers who are in the process of changing jobs are counted as being:

A) frictionally unemployed.

B) underemployed.

C) structurally unemployed.

D) cyclically unemployed.

Difficulty: Easy

111. A number of semi-skilled workers in an industry find themselves out of work when improvements in technology render their jobs obsolete. These workers experience _____ unemployment.

A) transitional

B) technological

C) structural

D) frictional

Difficulty: Medium

112. Which of the following is an example of frictional unemployment?

A) An autoworker is temporarily laid off from an automobile company due to a decline in sales

B) A geologist is permanently laid off from an oil company due to a new technological advancement

C) A worker at a fast-food restaurant quits work to attend college

D) A real estate agent leaves a job in Texas and searches for a similar, higher paying job in California

Difficulty: Medium

113. Which of the following is an example of structural unemployment?

A) An autoworker is temporarily laid off from an automobile company due to a decline in sales

B) A geologist is permanently laid off from an oil company due to a new technological advancement

C) A worker at a fast-food restaurant quits work to attend college

D) A real estate agent leaves a job in Texas and searches for a similar, higher paying job in California

Difficulty: Medium

114. Which of the following is an example of cyclical unemployment?

A) An autoworker is temporarily laid off from an automobile company due to a decline in sales

B) A geologist is permanently laid off from an oil company due to a new technological advancement

C) A worker at a fast-food restaurant quits work to attend college

D) A real estate agent leaves a job in Texas and searches for a similar, higher paying job in California

Difficulty: Medium

115. Which one of the following is an example of a frictionally unemployed individual?

A) Martin, who lacks the skills necessary to be employed as a machinist

B) Lee, who lost his job as an art director because of a recession

C) Jan, who is a high school dropout and is working as a bus driver

D) Helena, who has just graduated from law school and is searching for a job

Difficulty: Medium

116. Which of the following reduces the duration of frictional unemployment?

A) Subsidizing research and development in new areas of science and technology

B) Increasing the level of social security contributions from firms

C) Establishing employment agencies which give out information about job vacancies

D) Establishing labor unions which will protect workers from being laid off

Difficulty: Medium

117. What does the phrase “jobless recovery” refer to?

A) It refers to a situation where an economy is moving out of a recession without a significant increase in employment.

B) It refers to a situation in which rising productivity has made it possible for firms to reduce their workforce and increase output at the same time.

C) It refers to the phenomenon where U.S. firms move their production abroad, thereby destroying jobs in the domestic market and creating new jobs in foreign markets.

D) It refers to a situation in which a worker’s real wage falls despite increases in productivity.

Difficulty: Easy

118. In the Case in Point entitled “Might Increased Structural Unemployment Explain the ‘Jobless Recovery’ Following the 2001 Recession,” economists Erica Goshen and Simon Potter note that when a layoff is temporary, the employer “suspends” the job, due to slack demand, and the employee expects to be recalled once demand picks up. With a permanent layoff, the employer eliminates the job. Which of the following statements is consistent with their observations?

A) Both temporary and permanent layoffs create cyclical unemployment.

B) Both temporary and permanent layoffs create structural unemployment.

C) Temporary layoffs create structural unemployment while permanent layoffs create cyclical unemployment.

D) Temporary layoffs create cyclical unemployment while permanent layoffs create structural unemployment.

Difficulty: Moderate

True/False

1. When subprime mortgage loans were first sold, they were a profitable investment for the banks that sold them but proved to be a bad deal for home buyers.

2. While calculating real GDP, market prices are held constant at some level.

3. Nominal GDP of a particular year is calculated as the total value of final goods and services in that year in terms of the base-year prices.

4. The phases of a business cycle are identified by examining the growth of real GDP.

5. Typically, an economy is said to be in a recession when the nominal GDP drops for at least four consecutive quarters.

6. Even with a constant money wage, a recession can cause a significant decline in real income.

7. The point in the business cycle at which a recession begins is known as the trough.

8. A business cycle is complete when an economy moves from one peak to the next.

9. Immediately after the recession of 2007-08, the unemployment level among college graduates soared, but the average salary also increased.

10. Inflation refers to an increase in the average level of prices in an economy.

11. Deflation occurs when the rate of inflation falls over a period of time.

12. An increase in the price of petroleum in the international market is an example of global inflation.

13. Deflation increases the real value of money.

14. Both unexpected inflation and unexpected deflation create uncertainty about the future.

15. Unanticipated inflation helps lenders and hurts borrowers.

16. Inflation hurts people with fixed incomes.

17. The main cause of hyperinflation is an unanticipated increase in oil prices.

18. If the value of the price index in the current year is equal to 1, this means the current price of a particular market basket is the same as the price of that particular basket in the base period.

19. The CPI in a year is computed based on the prices of all the final goods and services produced during that period.

20. The PCE price index is computed using a fixed market basket.

21. The nominal wage divided by a price index provides the value of real wage.

22. If an economy is operating at its natural level of employment, unemployment is equal to zero.

23. The increased availability of job-related information online has lowered frictional unemployment.

Short Answer

1. What is the difference between a real value and a nominal value? Explain how a nominal value can be converted to a real value?

2. Explain how a new-product bias is created while computing certain price indexes.

3. Define the natural rate of unemployment. Identify three factors that may cause the natural rate to change over time.

4. What is structural unemployment? State the various reasons due to which it can arise in an economy.