Deck 5: Macroeconomics: the Big Picture

Question 1

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.

Answer 1

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

Question 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.

Answer 2

gross domestic product.

Question 3

Figure 5-1 shows the path of real GDP growth over time. Use the figure to answer questions 15-17.
Refer to Figure 5-1. The peak of the business cycle occurs:

A) between t₁ and t₃.
B) at t₃.
C) between t₂ and t₃.
D) at t₂.

Answer 3

at t₃.

Question 4

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

A) trough.
B) downturn.
C) peak.
D) lag.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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.

Question 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.

Question 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.

Question 12

Figure 5-1 shows the path of real GDP growth over time. Use the figure to answer questions 15-17.
Refer to Figure 5-1. 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.

Question 13

Figure 5-1 shows the path of real GDP growth over time. Use the figure to answer questions 15-17.
Refer to Figure 5-1. The trough of the business cycle occurs:

A) between t₁ and t₂.
B) at t₁.
C) between t₂ and t₃.
D) at t₂.

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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.

Question 18

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

A) peak.
B) trough.
C) expansion.
D) recession.

Question 19

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.

Question 20

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

A) peak.
B) trough.
C) expansion.
D) recession.

Question 21

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.

Question 22

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.

Question 23

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.

Question 24

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.

Question 25

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

Question 26

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.

Question 27

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

Question 28

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.

Question 29

Table 5-1 shows data on real GDP and employment for a particular country from the year 1991 to 2000. Use the table to answer questions 24-26.
Table 5-1

Refer to Table 5-1. 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.

Question 30

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

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

Table 5-1 shows data on real GDP and employment for a particular country from the year 1991 to 2000. Use the table to answer questions 24-26.
Table 5-1

Refer to Table 5-1. 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.

Question 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.

Question 36

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

Question 37

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.

Question 38

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.

Question 39

Table 5-1 shows data on real GDP and employment for a particular country from the year 1991 to 2000. Use the table to answer questions 24-26.
Table 5-1

Refer to Table 5-1. 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.

Question 40

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

Question 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.

Question 42

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

Question 43

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

Question 44

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

Question 45

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.

Question 46

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.

Question 47

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

Question 48

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.

Question 49

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.

Question 50

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.

Question 51

Table 5-2 shows the market basket for a typical college student. Use this data to answer questions 48-50.
Table 5-2

Refer to Table 5-2. 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

Question 52

Table 5-2 shows the market basket for a typical college student. Use this data to answer questions 48-50.
Table 5-2

Refer to Table 5-2. 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

Question 53

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

Question 54

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.

Question 55

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.

Question 56

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

Question 57

Table 5-2 shows the market basket for a typical college student. Use this data to answer questions 48-50.
Table 5-2

Refer to Table 5-2. 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

Question 58

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

Question 59

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
D) all intermediate goods produced in that period

Question 60

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.

Question 61

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%

Question 62

Table 5-7 shows a mechanic's hourly wage and the respective price indexes for the years 1975 and 2005. Use the table to answer questions 76-79.
Table 5-7

Refer to Table 5-7. Calculate a mechanic's real wage in 2005.

A) $26.25
B) $40
C) $70
D) $100.80

Question 63

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.

Question 64

Table 5-5 gives data on the consumer price index for a particular city. The base year is 2002. Use the table to answer questions 69-71.
Table 5-5

Refer to Table 5-5. 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.

Question 65

Table 5-3 shows price and output data for a small nation. Consider 2003 as the base period. Use the table to answer question 61.
Table 5-3

Refer to Table 5-3. What is the value of nominal output in 2003?

A) $100,000
B) $500,000
C) $125,000
D) $200,000

Question 66

Table 5-6 shows an assistant professor's salary and the respective price indexes for the years 1967 and 1997. Use the table to answer questions 73-75.
Table 5-6

Refer to Table 5-6. Calculate the real income for an assistant professor in 1967.

A) $2,381
B) $9,524
C) $10,000
D) $42,000

Question 67

Table 5-7 shows a mechanic's hourly wage and the respective price indexes for the years 1975 and 2005. Use the table to answer questions 76-79.
Table 5-7

Refer to Table 5-7. Calculate a mechanic's real wage in 1975.

A) $25
B) $30
C) $31.2
D) $36

Question 68

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.

Question 69

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.

Question 70

Table 5-6 shows an assistant professor's salary and the respective price indexes for the years 1967 and 1997. Use the table to answer questions 73-75.
Table 5-6

Refer to Table 5-6. 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.

Question 71

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.

Question 72

Table 5-4 shows price and output data for an economy. Assume that 1994 is the base period. Use the table to answer questions 65-67.
Table 5-4

Refer to Table 5-4. 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

Question 73

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.

Question 74

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%

Question 75

Table 5-6 shows an assistant professor's salary and the respective price indexes for the years 1967 and 1997. Use the table to answer questions 73-75.
Table 5-6

Refer to Table 5-6. 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

Question 76

Table 5-7 shows a mechanic's hourly wage and the respective price indexes for the years 1975 and 2005. Use the table to answer questions 76-79.
Table 5-7

Refer to Table 5-7. 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.

Question 77

Table 5-4 shows price and output data for an economy. Assume that 1994 is the base period. Use the table to answer questions 65-67.
Table 5-4

Refer to Table 5-4. 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

Question 78

Table 5-5 gives data on the consumer price index for a particular city. The base year is 2002. Use the table to answer questions 69-71.
Table 5-5

Refer to Table 5-5. What is the inflation rate in 2004?

A) 20.8%
B) 22%
C) 31.5%
D) 30%

Question 79

Table 5-5 gives data on the consumer price index for a particular city. The base year is 2002. Use the table to answer questions 69-71.
Table 5-5

Refer to Table 5-5. What is the inflation rate in 2005?

A) 5%
B) 20%
C) 25%
D) 50%

Question 80

Table 5-7 shows a mechanic's hourly wage and the respective price indexes for the years 1975 and 2005. Use the table to answer questions 76-79.
Table 5-7

Refer to Table 5-7. 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%.