Question 1

If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is

Accepted Answer

The answer of If actual GDP is $340 billion and...

Question 2

Okun's law

Accepted Answer

Okun's law shows the relationship between the unemployment rate and the size of the negative GDP gap. It indicates that for every 1% increase in unemployment above the natural rate, a 2% GDP gap occurs.

Question 3

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inﬂation in that year is

Accepted Answer

To calculate the rate of inflation, we use the formula: (CPI in current year - CPI in previous year)/(CPI in previous year) x 100

Using the numbers given, we get: (333-300)/300 x 100 = 11%

Therefore, the answer is choice A) 11%.

Question 4

The relationship between the size of the negative GDP gap and the unemployment rate is

Accepted Answer

The relationship between the size of the negative GDP gap and the unemployment rate is direct. This means that as the negative GDP gap increases (indicating a larger difference between actual and potential GDP), the unemployment rate also tends to increase. This relationship is explained by Okun's Law, which suggests that a larger negative GDP gap, indicating underutilization of economic resources, is associated with higher unemployment rates.

Question 5

The annual rate of inﬂation can be found by subtracting

Accepted Answer

The most common way to calculate the annual rate of inflation is to subtract last year's price index from this year's price index and divide the difference by last year's price index. This gives the percentage increase in prices from last year to this year, which represents the rate of inflation. Choice D is the only option that matches this method.

Question 6

$$\begin{array} { | l | c | } 
\hline \text { Potential Real GDP } & \$ 200 \text { Billion } \
\hline \text { Natural Rate of Unemployment } & 6 \% \
\hline \text { Actual Rate of Unemployment } & 12 \% \
\hline
\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. The size of the negative GDP gap as a percentage of potential GDP for the
Economy is

Accepted Answer

The answer of \[\begin{array} { | l | c |...

Question 7

If actual GDP is less than potential GDP,

Accepted Answer

If actual GDP is less than potential GDP, it means that there is a recessionary gap, indicating that the economy is operating below its full employment level. This results in higher unemployment rates, which means that the actual unemployment rate will be higher than the natural unemployment rate.

Question 8

If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is

Accepted Answer

A negative GDP gap indicates that the actual GDP is less than the potential GDP. Therefore, if the actual GDP is $500 billion and there is a negative gap of $10 billion, the potential GDP would be $500 billion + $10 billion = $510 billion.

Question 9

$$\begin{array} { | l | c | } 
\hline \text { Potential Real GDP } & \$ 200 \text { Billion } \
\hline \text { Natural Rate of Unemployment } & 6 \% \
\hline \text { Actual Rate of Unemployment } & 12 \% \
\hline
\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. If the unemployment rate in the economy fell to 6 percent, we could
Conclude that

Accepted Answer

Okun's law states that for every 1% decline in the unemployment rate, real GDP will increase by 2% above its potential level. In this case, the actual rate of unemployment is 12% and the natural rate of unemployment is 6%. This means that there is 6% of cyclical unemployment in the economy.

If the unemployment rate fell to 6%, this would mean that there is no more cyclical unemployment in the economy, and only structural and frictional unemployment would remain. This would also mean that the economy has moved from a point inside its production possibilities curve to a point on or near the curve. Therefore, the best choice is C.

Choice A is not correct because structural unemployment is a type of unemployment that exists regardless of the level of GDP, and reducing cyclical unemployment would not eliminate it.

Choice B is not correct because Okun's law does not refer to shifts in the production possibilities curve, but rather movement along the curve.

Choice D is not correct because nominal GDP would increase due to a decrease in unemployment, but real GDP would also increase due to the fact that the economy is now producing at its potential level.

Question 10

As applied to the price level, the "rule of 70" indicates that the number of years required for the price level to double can be found by

Accepted Answer

The "rule of 70" is a quick way to estimate the amount of time it takes for a variable to double in value based on its growth rate. To apply this rule to the price level, we divide 70 by the annual rate of inflation (measured as a percentage). For example, if the inflation rate is 4%, we would divide 70 by 4 to find that it would take approximately 17.5 years for the price level to double. Therefore, the correct choice is B, which states that the number of years required for the price level to double can be found by dividing the annual rate of inflation into 70.

Question 11

$$\begin{array} { | l | c | } 
\hline \text { Potential Real GDP } & \$ 200 \text { Billion } \
\hline \text { Natural Rate of Unemployment } & 6 \% \
\hline \text { Actual Rate of Unemployment } & 12 \% \
\hline
\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. The amount of output being forgone by the economy is

Accepted Answer

Okun's law states that for every 1% increase in the unemployment rate above the natural rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. The unemployment gap is 6% (12% - 6%), so the GDP gap is 12% (6% * 2). 12% of $200 billion is $24 billion.

Question 12

For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of

Accepted Answer

This is a statement of Okun's law, which relates changes in GDP with changes in unemployment. According to the law, for every 1 percentage point increase in unemployment above the natural rate, the GDP gap (the difference between actual and potential GDP) increases by 2 percentage points.

Question 13

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, actual GDP is

Accepted Answer

Actual GDP can be calculated by subtracting the negative GDP gap from potential GDP. Thus, actual GDP = potential GDP - negative GDP gap = $400 billion - $15 billion = $385 billion.

Question 14

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced

Accepted Answer

When the consumer price index (CPI) decreases, it indicates that the average level of prices has fallen, which is referred to as deflation. The percentage change can be calculated as (116 - 120) / 120 * 100 = -3.33%, indicating a deflation of 3.33 percent.

Question 15

If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, actual GDP is

Accepted Answer

The positive GDP gap means that actual GDP is below potential GDP. To find the actual GDP, we add the positive GDP gap to potential GDP: $330 billion + $30 billion = $360 billion. Therefore, the correct answer is C.

Question 16

Full-employment output is also called

Accepted Answer

Full-employment output is also known as potential output - the maximum output that can be produced when all of the economy's resources are fully employed. It represents the production level that can be achieved without putting upward pressure on inflation. Therefore, potential output is an important concept for policymakers to determine the most appropriate level of aggregate demand to achieve full employment while maintaining stable prices. Options A and D are incorrect because they don't describe the concept accurately, and option B is too broad and general to be a specific name for full-employment output.

Question 17

Inﬂation means that

Accepted Answer

Inflation means that prices on average are rising, although some particular prices may be falling. Real incomes may not necessarily be rising with inflation. A and B are not accurate descriptions of inflation as all prices may not be rising, and if they are, they may not be rising at the same rate.

Question 18

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of
Potential GDP is

Accepted Answer

Okun's law states that for every 1 percentage point by which the actual rate of unemployment exceeds the natural rate, a negative GDP gap of about 2 percent occurs. Therefore, a difference of 4 percentage points (9% - 5%) in unemployment rates would result in a negative GDP gap of about 8 percent (2% x 4).

Question 19

The consumer price index was 177.1 last year and 179.9 this year. Therefore, the current rate of inﬂation is about

Accepted Answer

The rate of inflation is calculated as the percentage increase in the consumer price index (CPI) from one year to the next. The formula is: [(Current Year CPI - Last Year CPI) / Last Year CPI] * 100. Using the given numbers: [(179.9 - 177.1) / 177.1] * 100 = 1.6 percent.

Question 20

Unemployment rates in industrialized nations

Accepted Answer

Unemployment rates in industrialized nations vary considerably from each other. Each country has its own labor market policies, economic conditions, and demographic factors that affect their unemployment rates. For example, as of 2019, the unemployment rate in the United States was at 3.5%, while in Spain it was at 13.8%. Additionally, even during the Great Recession, not all industrialized nations had unemployment rates that exceeded 10 percent.

Quiz 9: Business Cycles, Unemployment, and Inflation