ECON1A: Macroeconomics Final Exam: Chapter 8-10, 12, 13 Dr. Sung H. Kim Please do not write down anything on the test. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Table 9 -1 Total population Working-age population Employment Unemployment 20,000 15,000 1,000 100 Consider the data above for a simple economy. 1) Refer to Table 9 -1. The unemployment rate for this simple economy equals A) (100/1,100) 100. B) (100/15,000) 100. C) (100/20,000) 100. D) (100/1,000) 100. 1) 2) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness? A) people employed in the underground economy B) inflation C) unemployed persons falsely report themselves to be actively looking for a job D) discouraged workers 2) 3) We say that the economy is at full employment if the unemployment rate is equal to A) the sum of structural and cyclical unemployment. B) the amount of cyclical unemployment. C) zero. D) the natural rate of unemployment. E) the sum of frictional and cyclical unemployment. 3) 4) A car that is produced in 2016 is not sold until 2017. According to the definition of GDP, in which year's GDP should it be counted? A) The production cost will count as part of 2016 GDP while the sales price will count as part of 2017 GDP. B) Half of the sales price will count as part of 2016 GDP and half will count as part of 2017 GDP. C) 2017 D) 2016 4) 5) In a small economy, consumption spending in 2012 is $6,000, government purchases is $1,200, gross investment is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product in 2012? A) $9,700 B) $9,800 C) $10,800 D) $11,700 5) 6) Gross domestic product understates the total production of final goods and services because of the omission of A) intermediate goods. B) inflation. C) exports. D) the underground economy. 6) 1 7) Which of the following transactions represents the purchase of a final good? A) Delta buys a new European-made jetliner. B) Starbucks purchases coffee beans. C) Apple computer buys computer processors from Intel. D) Your father buys a new John Deere riding lawn mower. 7) 8) Suppose Mary works for Bob as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Mary stops working for Bob in order to care for the children. What will be the effect on GDP? A) GDP will decrease. B) GDP will not change. C) GDP will increase. D) GDP may increase or may decrease depending on inflation. 8) 9) By offering training to workers whose firms laid them off because of competition from foreign firms, the federal government is attempting to reduce A) seasonal unemployment. B) frictional unemployment. C) cyclical unemployment. D) structural unemployment. E) unnatural unemployment. 9) 10) Consumption expenditures do not include household purchases of A) education. B) medical care. C) new houses. D) durable goods. 10) 11) Suppose that nominal GDP in 2011 was less than real GDP in 2011. Given this information, we know for certain that A) the price level in 2011 was greater than the price level in the base year. B) real GDP in 2011 was greater than real GDP in the base year. C) the price level in 2011 was less than the price level in the base year. D) real GDP in 2011 was less than real GDP in the base year. 11) 12) Real GDP will increase A) only if the price level falls. B) only if the quantity of final goods and services produced rises. C) only if the price level rises. D) if either the price level rises or the quantity of final goods and services produced rises. 12) 13) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is A) 105% higher in year 2 than in year 1. B) 5% higher in year 2 than in year 1. C) 105% higher in year 1 than in year 2. D) 5% higher in year 1 than in year 2. 13) 14) Which of the following would be the best measure of the cost of living? A) GDP deflator B) real GDP C) consumer price index D) real GDP per person 14) 2 15) A consumer price index of 160 in 1996 with a base year of 1982-1984 would mean that the cost of the market basket A) rose 60% from the cost of the market basket in the base year. B) rose 160% from the cost of the market basket in the base year. C) equaled $160 in 1996. D) equaled $160 in 1983. 15) 16) If your nominal wage rises faster than the price level, we can say your real wage has ________ and the purchasing power of your income has ________. A) fallen; fallen B) risen; risen C) risen; fallen D) fallen; risen 16) 17) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation A) equal to 0 percent. B) equal to 7 percent. C) less than 7 percent. D) greater than 7 percent. 17) 18) A good measure of the standard of living is A) total real GDP. C) total nominal GDP. 18) B) real GDP per capita. D) nominal GDP per capita. 19) Labor productivity will increase if the ________ increases and ________. A) quantity of labor per unit of capital; immigration increases while capital is fixed B) quantity of labor per unit of capital; technology improves C) quantity of capital per hour worked; technology improves D) quantity of capital per hour worked; immigration increases while capital is fixed 19) 20) Public saving in the economy can be increased by A) raising government spending. C) raising taxes. 20) B) raising transfer payments. D) lowering taxes. 21) In a closed economy, what is the relationship between saving and investment? A) Investment is equal to saving. B) Saving is greater than investment. C) investment is greater than saving. D) Investment may be greater or smaller than saving. 21) 22) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) increase; increase further B) increase; decrease C) decrease; decrease further D) decrease; increase 22) 23) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid? A) 16 percent B) 12 percent C) 8 percent D) 6 percent 23) 3 24) During a recession, spending on ________ tends to fall more dramatically than spending on ________. A) nondurable goods; durable goods B) food; cars C) necessities; luxuries D) durable goods; nondurable goods 24) 25) Net exports usually ________ when the U.S. economy is in a recession and ________ when the U.S. economy is expanding. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease 25) 26) An unplanned decrease in inventories results in A) a decrease in planned investment. B) actual investment that is greater than planned investment. C) an increase in planned investment. D) actual investment that is less than planned investment. 26) 27) Which of the following will reduce consumer expenditures? A) a decrease in the price level B) a decrease in expected future income C) a decrease in interest rates D) a general increase in housing prices 27) 28) If the marginal propensity to consume is 0.6, the marginal propensity to save is A) 0.4. B) 0.6. C) 1. D) 1.5. 28) 29) ________ spending follows a smooth trend whereas, ________ spending is more volatile and subject to fluctuations. A) Consumer; government B) Government; consumer C) Consumer; investment D) Investment; consumer 29) 30) If planned aggregate expenditure is greater than total production, A) firms will experience an unplanned decrease in inventories. B) the economy is in equilibrium. C) GDP will decrease. D) actual inventories will equal planned inventories. 30) 31) If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then A) the multiplier is 0.1. B) the multiplier is 1. C) the multiplier is 10. D) the multiplier is 100. 31) 32) Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure? A) As the price level rises, government spending falls, which lowers aggregate expenditure. B) Price level increases in the United States relative to other countries raise net exports, which lowers aggregate expenditure. C) Price level increases raise real wealth, which causes consumption spending and aggregate expenditure to decline. D) Price level increases cause firms and consumers to hold more money, which raises the interest rate. Higher interest rates lower consumption and planned investment expenditures, which lowers aggregate expenditure. 32) 4 33) If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like? A) It is a vertical line at $4.2 trillion of GDP. B) It is a vertical line at a level of GDP above $4.2 trillion. C) It is a horizontal line at $4.2 trillion of GDP. D) It is a vertical line at a level of GDP below $4.2 trillion. 33) 34) An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A) The price level will rise, and the level of GDP will be unaffected. B) The price level will fall, and the level of GDP will rise. C) The price level will fall, and the level of GDP will fall. D) The price level will rise, and the level of GDP will fall. 34) 35) The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve? A) This will shift the aggregate demand curve to the left. B) This will shift the aggregate demand curve to the right. C) This will move the economy down along a stationary aggregate demand curve. D) This will move the economy up along a stationary aggregate demand curve. 35) 36) How do lower taxes affect aggregate demand? A) They reduce disposable income, consumption, and aggregate demand. B) They increase aggregate supply and thus increase aggregate demand as well. C) they increase corporate investment and aggregate demand. D) They increase disposable income, consumption, and aggregate demand. 36) 37) The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly. A) infinite; final goods and services; inputs B) positive; final goods and services; inputs C) positive; inputs; final goods and services D) infinite; inputs; final goods and services 37) 38) Workers expect inflation to rise from 3% to 5% next year. As a result, this should A) move the economy down along a stationary short-run aggregate supply curve. B) move the economy up along a stationary short-run aggregate supply curve. C) shift the short-run aggregate supply curve to the left. D) shift the short-run aggregate supply curve to the right. 38) 39) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Prices will increase. B) Output will decrease. C) Unemployment will rise. D) Short-run aggregate supply will shift to the right. 39) 5 40) A decrease in investment causes the price level to ________ in the short run and ________ in the long run. A) increase; decrease B) increase; increase further C) decrease; decrease further D) decrease; increase 6 40)