Question 1

In the expansion phase of the business cycle

Accepted Answer

In the expansion phase of the business cycle, all three statements are true. Output is rising, which means the economy is growing, and businesses are producing more goods and services. As a result, unemployment is falling as businesses need to hire more workers to meet the increased demand. Consumer and business confidence is high because people and firms expect the good times to continue, and they are more likely to spend and invest in the economy.

Question 2

Why does the term full employment imply an unemployment rate greater than zero? Discuss your answer in terms of the types of unemployment.
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Accepted Answer

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Question 3

Which of the following is not a leading economic indicator?

Accepted Answer

The unemployment rate is a lagging economic indicator, as it reflects changes in the economy that have already occurred rather than predicting future trends. The other three choices are all leading economic indicators, as they can provide insight into the direction of the economy before changes are reflected in broader economic data.

Question 4

The current cost of a market basket of goods is $800. The cost of the same basket of goods in the base year was $1,000. The current price index is:

Accepted Answer

The price index is calculated by dividing the current cost of the market basket by its cost in the base year and multiplying by 100. 
Therefore, price index = (Current cost / Base year cost) x 100 
= (800 / 1000) x 100 
= 80 
Hence, the answer is C) 80.

Question 5

Fred has lost his factory job, replaced by welding robots, and soon plans to go to technical school to learn computer repair because he cannot find a similar job to the one he lost. The type of unemployment facing Fred is:

Accepted Answer

Structural unemployment refers to a mismatch between the skills that workers possess and those required by employers. In Fred's case, his job loss is a result of technological advancements that have replaced his job with welding robots. This type of unemployment is structural because his skill set is no longer in demand, and he needs to acquire new skills to find employment.

Question 6

Why do economists prefer using the term economic fluctuation rather than business cycle?

Accepted Answer

Economists prefer using the term economic fluctuation instead of business cycle because cycles suggest a regularity and predictability that are not always present in the economy. Economic fluctuations better reflect the unpredictable and irregular nature of the economy's ups and downs.

Question 7

If the price index is now 120, it means:

Accepted Answer

A price index of 120 means that prices have increased by 20 percent (or 0.20) compared to the base year. This can be calculated by subtracting 100 from the index (120-100=20) and then dividing by the base year value (20/100=0.20 or 20%). Therefore, choice B is the correct answer. Choice A is incorrect because it suggests that prices are 120 percent higher, which would imply a price index of 220. Choice C is incorrect because it suggests that prices are only 1.2 percent higher, which would imply a price index of 101.2. Choice D is also incorrect because the price index does not provide information about nominal or real GDP.

Question 8

A price index can be constructed by:

Accepted Answer

This is the definition of the price index or the consumer price index (CPI). The base year is used as a reference point, and the current year value is divided by the base year value and multiplied by 100 to express it as a percentage. This formula helps to measure the percentage change in prices of goods and services over time.

Question 9

The CPI:

Accepted Answer

The GDP deflator includes all products produced domestically, while CPI includes a more limited set of goods and services commonly consumed by individuals.

Answer: B 
 The GDP deflator includes investment and government spending, along with consumption, which can increase at different rates than the consumer price index in inflationary conditions.

Answer: C 
 The CPI excludes imported goods, while the GDP deflator includes all goods produced domestically, whether they are consumed or invested in.

Answer: D 
 The CPI is a commonly reported measure of inflation that is widely used by individuals and businesses to track changes in the cost of goods and services over time.

Question 10

Underemployment occurs when:

Accepted Answer

Underemployment occurs when a worker is overqualified for their job and possesses more skills than what their current job demands. This can lead to frustration and dissatisfaction for the worker, as they are not fully utilizing their skills and abilities.

Question 11

Which of the following observations concerning phases of a business cycle is incorrect?

Accepted Answer

The maximum amount of unemployment typically occurs after the trough, during the early stages of the expansion phase.

Question 12

Fred lost his factory job, replaced by welding robots. He is now going to technical school to learn computer repair because he cannot find a similar job to the one he lost. Fred is:

Accepted Answer

The answer of Fred lost his factory job, replaced by...

Question 13

Which of the following groups would not tend to lose from unexpected inflation?

Accepted Answer

Those whose wages have cost of living adjustment clauses in their contracts will not tend to lose from unexpected inflation as their wages would increase with the increase in cost of living.

Question 14

In general, the only thing that can cause a sustained increase in the rate of inflation is:

Accepted Answer

The quantity theory of money suggests that an increase in the supply of money leads to an increase in prices. Therefore, a sustained increase in the rate of inflation can only be caused by a high rate of growth in the supply of money. The other choices, such as increased unemployment, decreased real GDP, or increased federal income taxes, may have short-term effects on inflation, but they cannot sustainably increase the rate of inflation over a longer period of time.

Question 15

What are the three major types of unemployment? What are their causes?
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Accepted Answer

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Question 16

Suppose you live in a community of 100 people where everyone who is able to do so seeks work. If 80 people are over 16 years old and 72 of them are employed, what is the unemployment rate in this community?

Accepted Answer

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Question 17

Which of the following is false?

Accepted Answer

The correct formula for a price index is the cost of the chosen market basket in the current year divided by the cost of the same market basket in the base year, times 100.

Question 18

Fred lost his factory job, replaced by welding robots. He has now given up looking for work. Fred is:

Accepted Answer

Fred is not considered unemployed because he has stopped looking for work, which means he is not actively seeking employment and thus not counted in the unemployment statistics.

Question 19

The current cost of a market basket of goods is $9,000. The cost of the same basket of goods in the base year was $3,000. The current price index is:

Accepted Answer

The price index is calculated by dividing the current cost by the base year cost and then multiplying by 100. So, ($9,000 / $3,000) * 100 = 300.

Question 20

The GDP deflator:

Accepted Answer

The GDP deflator is a broad measure of inflation that includes all goods and services produced domestically, making it the broadest measure of inflation generally reported. Unlike the CPI, which focuses on a basket of goods and services purchased by households, the GDP deflator encompasses the prices of all domestically produced goods and services, including investment goods and government services.

Quiz 10: Consumer Choice Theory