Deck 1: Economic Growth, Fluctuation, and Policy

Question 1

Let nominal GDP change from $10,000 billion to $11,000 billion over the course of one year. If prices have increased uniformly by 5 percent over the same year, real GDP

A) has remained unchanged.
B) has increased by 5 percent.
C) has increased by 15 percent.
D) has increased by 10 percent.
E) has decreased by 10 percent.

Answer 1

has increased by 5 percent.

Question 2

The rate of inflation in the United States was highest in

A) 1992.
B) 1979.
C) 1982.
D) 1980.
E) 1975.

Answer 2

1980.

Question 3

Since 1966 in the United States, there have been

A) six recessions, of which the one beginning in 1979 was the most severe.
B) five recessions of note with unemployment climbing above 9 percent.
C) six recessions, each of which was worse than the recession of the early 1920s.
D) six recessions, but only one that produced unemployment rates above 7 percent.
E) six recessions, of which the one beginning in 1981 was the most severe.

Answer 3

six recessions, of which the one beginning in 1981 was the most severe.

Question 4

Interest rates in the United States have

A) held remarkably steady over the past two decades.
B) shown some variability over the past two decades but less in the early 1980s than the mid-1960s.
C) shown significant variability over the past two decades, with no discernible correlation with movement in GDP.
D) tended to peak just when the economy is turning out of a recession and into a period of prolonged recovery.
E) none of the above.

Question 5

Roughly defined, the unemployment rate is

A) the percentage of people looking for work who have not yet found work.
B) the percentage of the population that is not employed.
C) the percentage of the adult population that cannot find a job either at home or in business.
D) the percentage of the population that is, for one reason or another, unemployable at any job.
E) all of the above.

Question 6

Potential GDP is a measure of

A) all the goods and services produced by an economy from its inception to the present.
B) the value of the goods and services that could be produced if the economy operated with all of its people employed.
C) the value of the goods and services that could be produced if the economy operated at the full capacity of its capital stock with its entire labor force fully employed.
D) the rate at which an economy's GDP could grow if its rate of investment is maximized.
E) the lowest level to which interest rates could fall and still maintain full employment.

Question 7

Which of the following is not discussed by the text as a possible source of business cycle fluctuations?

A) Private sector disturbances
B) Changes in monetary policy
C) Changes in fiscal policy
D) Energy supply disturbances
E) None of the above

Question 8

With the presence of a short-run trade-off between inflation and unemployment, changes in international conditions that caused domestic aggregate demand to increase at every price level,

A) prices and GDP would climb.
B) prices would climb and GDP would fall.
C) prices would climb but GDP would remain below its potential.
D) prices would fall and GDP would remain at its potential.
E) prices would climb to maintain GDP at its potential.

Question 9

The term rational expectations is most accurately associated with the notion that

A) economic policy is ineffective and should not be used in a discretionary way.
B) it is always possible to reduce inflation without recession by simply letting aggregate demand fall as it will do automatically.
C) tax adjustments have no effect, but changes in the money supply can stimulate growth in an economy.
D) people always use as much information as possible in forming and acting on their expectations of the future.
E) all of the above.

Question 10

The recession experienced in the United States in the early 1980s was

A) mild compared with the experience of the mid-1970s.
B) the worst economic downturn suffered since the Great Depression.
C) the fifth economic downturn since 1966.
D) only the fourth economic downturn suffered since the Second World War.
E) quite severe, but unemployment never climbed above 10 percent.

Question 11

The real money supply

A) tends to grow over time because growing economies need increasingly large quantities of money to support their activity.
B) grows only in response to deliberate contractions in the money supply that lower the price level at a more rapid pace.
C) moves up or down only when the price level changes.
D) is impossible to measure because of the confusion caused by international transactions in the currencies of other countries.
E) is the primary policy tool of the Keynesian economist.

Question 12

Let a price index increase from 136.2 to 140.3 to 144.5 over the course of two successive years. Average annual inflation over the period is then

A) 5 percent.
B) 2 percent.
C) 3 percent.
D) 4.2 percent.
E) 8.3 percent.

Question 13

When an economy turns into a recession so that GDP declines for a period of time, experience tells us to expect

A) a rapid increase in the rate of unemployment and a rapid decline in the rate of inflation.
B) a potentially rapid decline in the rate of unemployment and an increase in the rate of inflation.
C) an increase in the rate of unemployment and a gradual increase in the rate of interest.
D) an increase in the rate of unemployment and gradual reductions in both the rate of inflation and the rate of interest.
E) an increase in the rate of unemployment and movement in interest rates and prices in either direction.

Question 14

The dollar value, adjusted for changes in the price level, of all goods and services produced by an economy in one year is called

A) the gross domestic product.
B) the rate of inflation.
C) the real level of consumption.
D) the real gross domestic product.
E) the real rate of interest.

Question 15

The rate of inflation is

A) the absolute change in a price level index from one year to the next.
B) the percentage change in a price level index from one year to the next.
C) the difference between GDP and the real level of GDP.
D) always equal to the rate of interest charged by banks to borrow money.
E) b and c.

Question 16

An aggregate supply schedule drawn to be consistent with no trade-off between inflation and unemployment would

A) be horizontal at some price level determined by aggregate demand.
B) be horizontal at some price level determined by interest rates and government policy.
C) be vertical above an arbitrary level of GDP.
D) be vertical above a level of GDP determined by the capital stock, availability of labor, and technology embodied in production across the economy.
E) slope upward to some degree to reflect the influences of financial factors on demand.

Question 17

Consider an asset costing $55 and returning, by contract, $11 per year. If the interest rate prevailing throughout the economy were 10%, you would expect to see

A) the interest rate returned by the asset to climb to 30%.
B) the price of the asset to climb to $100.
C) the price of the asset to climb to $110.
D) the price of the asset to fall to $45.
E) the price of the asset to fall to $27.50.

Question 18

Six separate recessions marked the two decades from 1966 through 2002,

A) but the long-term trend of real GDP in the United States was nonetheless upward.
B) and the result was a 20-year period during which real GDP did not climb at all in the United States.
C) and their effects were so serious that real GDP in the United States was actually lower in 1985 than it was in 1966.
D) and they caused the total number of people employed in the United States to be smaller in 1985 than it was in 1966.
E) none of the above.

Question 19

The usual pattern of a business cycle is

A) peak, trough, recovery, recession.
B) peak, recovery, trough, recession.
C) recession, peak, recovery, trough.
D) recession, trough, recovery, peak.
E) no pattern.

Question 20

The unemployment rate in the United States was highest in

A) 1992.
B) 1982.
C) 1975.
D) 1979.
E) 1991.

Question 21

The Taylor rule accurately described Federal Reserve behavior since the mid-1980s by focusing on which of the following economic variables?

A) Interest rate targets
B) Inflation targets
C) GDP gaps
D) a and b
E) b and c

Question 22

An argument that links the inflation of the early 1970s with excessive government spending on the Vietnam War and thus on excessive aggregate demand

A) is consistent with the conclusions that could be drawn from a model with inflation and unemployment trade-offs.
B) is not consistent with the conclusions that could be drawn from a model with trade-offs between inflation and unemployment and with GDP initially well below its potential.
C) is consistent with the general foundations of a rational-expectations model.
D) is consistent with the views that firms and consumers make the most of information available to them.
E) all of the above.

Question 23

The notion that expectations can significantly influence macroeconomic activity

A) is an innovation of the rational expectations theorists.
B) is true, but only in the context of random, uncontrollable effects.
C) was introduced as a systematic influence that could be exploited by policy as early as the 1930s by Keynes.
D) is inconsistent with the core of practical macroeconomics.
E) none of the above.

Question 24

Which of the following forces are potential sources for causing actual GDP to fluctuate above or below its potential?

A) Spending on consumer durables
B) Capital stock replacement
C) Federal Reserve policy
D) Congressional budget policies
E) All of the above

Question 25

Long-run economic growth depends on the growth of all of the following except

A) capital.
B) technology.
C) the labor force.
D) productivity growth.
E) none of the above.

Question 26

Suppose that aggregate demand were to change, over the course of a year during which potential GDP was frozen at $10,000, from Y = 11,000 - 10P to Y = 11,100 - 10P. The rate of inflation that would occur in the flexible price long-run growth model is

A) 10 percent.
B) 15 percent.
C) 5 percent.
D) 0 percent.

Question 27

An argument that links an increase in federal taxes with lower aggregate demand and therefore a contraction of GDP to a level below its potential

A) is consistent with the conclusions that would be drawn from a model with inflation and unemployment trade-offs.
B) is consistent with the conclusions that would be drawn from a model without inflation and unemployment trade-offs.
C) is inconsistent with a model that incorporates rational expectations.
D) can be believed only if expressed in terms of long-run and not short- term effects.
E) none of the above.

Question 28

A reduction in aggregate demand with no trade-off between inflation and unemployment would

A) cause wages and prices to fall so that the aggregate quantity demanded would support full employment.
B) cause wages to climb and prices to fall so that the aggregate quantity demanded would support full employment.
C) cause wages and prices to climb and portend a coming recession.
D) cause wages, prices, and GDP to decline in the long run.
E) none of the above.

Question 29

Which of the following are generally thought by macroeconomists to contribute to growth over the long run?

A) Growing population
B) Rising employment
C) Increases in plant, equipment, and other capital
D) Improved technology
E) b, c, and d only

Question 30

Let Y = 11,000 - 10P represent an aggregate demand curve. If potential GDP were $10,000, the price level that would produce aggregate demand just supporting that potential would be

A) 110.
B) 100.
C) 90.
D) 105.
E) 75.

Question 31

A model that envisions no short-run trade-off between inflation and unemployment can explain recession only in terms of

A) increases in aggregate demand.
B) decreases in aggregate demand.
C) an increase in the number of people looking for work without a corresponding increase in the number of jobs.
D) sudden surges in investment that cause the capital stock to increase too quickly.
E) none of the above.

Question 32

Suppose that the price level for some economy were 100 in 2000, 110 in 2001, and 119 in 2002. The rate of inflation between 2000 and 2001 would be

A) 19.0 percent.
B) 9.9 percent.
C) 10.0 percent.
D) 9.1 percent.
E) none of the above.

Question 33

Total output produced by a nation must somehow be divided among competing sectors of the economy, that is, consumption, investment, government, and the foreign sector. The long-run growth model attributes the central role for this dividing process to

A) wholesale and retail prices.
B) government officials.
C) interest rates.
D) households.
E) firms.

Question 34

To explain the Great Depression, a model with perfectly flexible wages and prices would have to assume that

A) the people counted as unemployed during the period did not want to work, so that their potential contribution would not be part of potential GDP.
B) none of the capacity idled by the downturn was productive, so that its potential contribution would not be part of potential GDP.
C) some sort of disturbance caused potential GDP to fall dramatically over a period of one or two years.
D) all of the above.
E) none of the above.

Question 35

Recessions and booms are short-term disturbances that are self-correcting, since

A) prices tend to rise less rapidly when output exceeds potential.
B) prices tend to rise more rapidly when output falls below potential.
C) prices tend to rise more rapidly when output exceeds potential.
D) prices tend to rise less rapidly when output falls below potential.
E) c and d.

Question 36

In a model with short-run trade-offs between inflation and unemployment, real GDP is determined in the short run by

A) the intersection of a vertical potential GDP schedule and the current price level.
B) the intersection of a horizontal potential GDP schedule with the current price level.
C) the intersection of a downward-sloping aggregate demand curve and the current price level.
D) the intersection of a downward-sloping aggregate demand curve and a vertical potential GDP schedule.
E) none of the above.

Question 37

Suppose that the nominal GDP of an economy were $10,000 in 2000 and
$10,500 in 2001. If the price index were 100 in 2000 and 105 in 2001, then real GDP

A) would rise by 5 percent from 2000 to 2001.
B) would fall by 5 percent from 2000 to 2001.
C) would hold constant from 2000 to 2001.
D) would rise but by less than 1 percent, from 2000 to 2001.
E) cannot be determined from the information provided.

Question 38

Suppose that potential GDP were to climb by 1 percent from an initial level of $10,000 during a year in which aggregate demand changed from Y = 11,000 - 10P to Y = 11,100 - 10P. The rate of inflation in the flexible price long-run growth model is

A) 10 percent.
B) 5 percent.
C) 0 percent.
D) -5 percent.
E) 15 percent.

Question 39

A country's long-run growth rate is important for policy makers to understand and work to improve because of its contribution to a country's

A) comparative advantage.
B) absolute advantage.
C) standard of living.
D) ability to conduct monetary policy.
E) none of the above.

Question 40

If inflation were running at 15 percent and insurance companies were stuck with old policies that promised to lend money against cash value at 5 percent, then the real interest rate that these companies would receive on those loans is

A) 20 percent.
B) 10 percent.
C) -10 percent.
D) -15 percent.
E) -20 percent.

Question 41

Suppose you were to observe an increase in real GDP with no change in the price level. If you held the long-run perspective of no trade-offs between inflation and unemployment, you could explain your observation only in terms of

A) a simultaneous reduction in aggregate demand and potential GDP.
B) an increase in aggregate demand alone.
C) an increase in potential GDP with no change in aggregate demand.
D) a simultaneous increase in aggregate demand and potential GDP.
E) an increase in aggregate demand accompanied by a reduction in potential GDP.

Question 42

Given the existence of short-run trade-offs between inflation and unemployment, short-run GDP can be expected to increase if

A) aggregate demand falls.
B) aggregate demand rises.
C) potential GDP increases because the labor supply has increased.
D) potential GDP increases because of some technological improvement.
E) potential GDP increases because of an increase in the capital stock.

Question 43

Let aggregate demand in an economy with a potential GDP of 10,000 be represented initially by AD = 8,400 + 2,000/P. Suppose that over the course of one year, potential GDP rose to 10,500 and aggregate demand shifted to AD = 9,000 + 2,000/P. You should expect to have witnessed, over the course of that year,

A) no price inflation.
B) price inflation of 6.67 percent.
C) price disinflation of 6.67 percent.
D) price inflation of 1.67 percent.
E) price disinflation of 1.67 percent.

Question 44

An important difference between the complete model and the long-run growth model is that

A) the growth model assumes real GDP equals potential GDP in the long run.
B) the complete model allows departures of GDP from potential GDP in the long run.
C) the complete model allows departures of real GDP from potential GDP in the short run.
D) the growth model allows GDP to change due to changes in potential GDP in the long run.
E) all of the above.

Question 45

The Taylor principle emphasizes the importance of the relationship between which of the following economic variables?

A) Real interest rates
B) Inflation rates
C) Nominal interest rates
D) a and b
E) b and c

Question 46

In the long-run growth model, a decline in defense spending would

A) lead to an increase in real GDP in the short run.
B) lead to a fall in real GDP in the short run, unless it were offset by increased government spending.
C) have no significant impact on real GDP in the short run.
D) lead to a fall in real GDP whether it were offset by increased government spending or not.
E) none of the above.

Question 47

Suppose you observe an increase in both GDP and prices. If you hold to the long-run perspective of no trade-offs between inflation and unemployment, you can explain your observation

A) entirely in terms of a downward shift in aggregate demand.
B) entirely in terms of an upward shift in aggregate demand.
C) entirely in terms of a reduction in potential GDP.
D) entirely in terms of an increase in potential GDP.
E) only in terms of changes in both aggregate demand and potential GDP.

Question 48

In the complete model, the economy moves back to potential GDP via

A) gradual adjustment of the price level to restore spending to the level consistent with full employment.
B) gradual shifts of the aggregate demand schedule due to increased investment spending that results from changes in the price level.
C) gradual shifts of the aggregate demand schedule due to increased net export spending that results from changes in the price level.
D) gradual movements in potential GDP that eventually bring it in line with the actual level of real GDP.
E) none of the above.

Question 49

Let the price level of a given economy increase from 100 to 107.2 over the course of one year. If the nominal rate of interest were 7.2 percent over that period, then the real rate of interest would have been

A) 0 percent.
B) 5 percent.
C) 7.2 percent.
D) 12.2 percent.
E) -2.2 percent.

Question 50

An important distinction between microeconomics and macroeconomics is that

A) only microeconomics is concerned with the behavior of firms.
B) only microeconomics is concerned with consumer behavior.
C) macroeconomics is not concerned with the organization of the labor markets and industry.
D) macroeconomics tries to explain the determination of variables that microeconomists take as given.
E) all of the above.

Question 51

The long-run growth model

A) analyzes the adjustment process the economy experiences after shocks.
B) is based on sticky prices.
C) analyzes the economy after complete adjustment has occurred in response to any disturbance.
D) clearly demonstrates the usefulness of fiscal and monetary policy in fighting recessions.
E) none of the above.

Question 52

In the 32 years from 1970 through 2000, the U.S. economy experienced how many recessions?

A) 8.
B) 11.
C) 5.
D) 2.
E) 6.

Question 53

Suppose that you were to observe GDP climbing even while prices were falling. If you were to take a long-term perspective, you could explain your observation in terms of

A) an increase in aggregate demand accompanied by a reduction in potential GDP.
B) a reduction in aggregate demand accompanied by a reduction in potential GDP.
C) an increase in aggregate demand alone.
D) an increase in potential GDP alone.
E) any of these depending on economic circumstance.

Question 54

Let the aggregate demand schedule be given by AD = 8,400 + 2,000/P and the potential GDP be equal to 10,000. The price level required to sustain equilibrium at potential GDP is then

A) 1.00.
B) 1.10.
C) 1.25.
D) 1.50.
E) 1.65.

Question 55

Given a model of long-run growth, which of the following could be advanced as an explanation of an increase in GDP?

A) A reduction in the capital stock
B) An improvement in technology
C) An increase in some input prices
D) A reduction in the supply of labor
E) All of the above