MACROECONOMICS I

Multiple choice questions Chapters 1 and 2

2 LE 2 LADE Group with International Projection Spring 2007

Professors: Mikel Casares Polo Jos Enrique Galdn Snchez

 Multiple Choice Questions

Chapter 1
Introduction to Macroeconomics
1. Average labor productivity is the (a) amount of workers per machine. (b) amount of machines per worker. (c) ratio of employed to unemployed workers. (d) amount of output per worker. When national output rises, the economy is said to be in (a) an expansion. (b) a deflation. (c) an inflation. (d) a recession. Which of the following best describes a typical business cycle? (a) Economic expansions are followed by economic contractions. (b) Inflation is followed by unemployment. (c) Trade surpluses are followed by trade deficits. (d) Stagflation is followed by inflationary economic growth. During recessions, the unemployment rate ___________ and output ___________. (a) rises; falls (b) rises; rises (c) falls; rises (d) falls; falls The number of unemployed divided by the labor force equals (a) the inflation rate. (b) the labor force participation rate. (c) the unemployment rate. (d) the misery index. The highest and most prolonged period of unemployment in the United States over the last 125 years occurred during (a) World War II. (b) the 1890s Depression. (c) the 19901991 recession. (d) the Great Depression of the 1930s. During the Great Depression, the unemployment rate for the United States peaked at approximately

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(a) 10%. (b) 70%. (c) 45%. (d) 25%. A country is said to be experiencing inflation when (a) prices of most goods and services are rising over time. (b) prices of most goods and services are falling over time. (c) total output is rising over time. (d) total output is falling over time. From 1800 to 1940, the price level in the United States (a) trended neither upward nor downward. (b) fluctuated wildly. (c) declined slowly. (d) increased slowly. Before World War II, the average level of prices in the United States usually (a) fell during wartime and rose during peacetime. (b) fell during wartime and fell during peacetime. (c) rose during wartime and fell during peacetime. (d) rose during wartime and rose during peacetime. The inflation rate is the (a) percent increase in the average level of prices over a year. (b) percent increase in output over a year. (c) percent increase in the unemployment rate over a year. (d) price level divided by the level of output. If the price level was 100 in 1999 and 102 in 2000, the inflation rate was (a) 102%. (b) 20%. (c) 2%. (d) 0.2%. A closed economy is a national economy that (a) doesnt interact economically with the rest of the world. (b) has a stock market that is not open to traders from outside the country. (c) has extensive trading and financial relationships with other national economies. (d) has not established diplomatic relations with other national economies. U.S. imports are goods and services (a) produced abroad and sold to Americans. (b) produced in the United States and sold to Americans. (c) produced abroad and sold to foreigners. (d) produced in the United States and sold to foreigners. Following World War I and World War II, the United States had a (a) small trade surplus. (b) small trade deficit. (c) large trade deficit. (d) large trade surplus. In the 1980s and 1990s, the United States has had a (a) small trade surplus. (b) small trade deficit.

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(c) large trade deficit. (d) large trade surplus. A country has a trade surplus when (a) imports exceed exports. (b) imports equal exports. (c) exports exceed imports. (d) import is zero. A country has a trade deficit when (a) imports exceed exports. (b) imports equal exports. (c) exports exceed imports. (d) export is zero. Data on exports and imports for the United States over the period from 1890 to 2001 show that (a) the United States had large trade deficits throughout this entire period. (b) the United States had large trade surpluses throughout this entire period. (c) the percentage of total output exported by U.S. firms fell dramatically during World War I and World War II. (d) a higher percentage of U.S. goods was exported in recent years than in earlier years. A central bank is an institution that (a) pays for government expenditures. (b) controls a nations monetary policy. (c) runs a countrys stock market. (d) determines a nations fiscal policy. Why were the U.S. government budget deficits of the 1980s and 1990s so unusual from a historical point of view? (a) It was the first time the U.S. government had ever run deficits. (b) In the past, deficits were usually that large only in wartime. (c) It was the first time that deficits were accompanied by very high rates of inflation. (d) It was the first time that deficits diverted funds from other productive uses, such as investment in modern equipment. The difference between microeconomics and macroeconomics is that (a) microeconomics looks at supply and demand for goods, macroeconomics looks at supply and demand for services. (b) microeconomics looks at prices, macroeconomics looks at inflation. (c) microeconomics looks at individual consumers, macroeconomics looks at national totals. (d) microeconomics looks at national issues, macroeconomics looks at global issues. Aggregation is the process of (a) calculating real GDP based on nominal GDP and the price index. (b) summing individual economic variables to obtain economywide totals. (c) forecasting the components of GDP. (d) predicting when recessions will occur. A set of ideas about the economy that have been organized in a logical framework is called (a) empirical analysis. (b) a methodology. (c) economic theory.

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(d) data development. If the theory behind an economic model fits the data poorly, you would probably want to (a) use the theory to predict what would happen if the economic setting or economic policies change. (b) start from scratch with a new model. (c) enrich the model with additional assumptions. (d) restate the research question. Equilibrium in the economy means (a) unemployment is zero. (b) quantities demanded and supplied are equal in all markets. (c) prices are not changing over time. (d) tax revenues equal government spending, so the government has no budget deficit. Adam Smiths idea of the invisible hand says that given a countrys resources and its initial distribution of wealth, the use of markets will (a) insulate a nation from the effects of political instability. (b) eliminate problems of hunger and dissatisfaction. (c) eliminate inequalities between the rich and the poor. (d) make people as economically well off as possible. The two most comprehensive, widely accepted macroeconomic models are (a) the classical model and the supply-side model. (b) the supply-side model and the real business cycle model. (c) the classical model and the Keynesian model. (d) the Austrian model and the Keynesian model. Classical economists argue that (a) the government should have an active role in the economy. (b) government policies will be ineffective and counterproductive. (c) the government should actively intervene in the economy to eliminate business cycles. (d) wages and prices dont adjust quickly, so the economy is slow to return to equilibrium. Keynes was motivated to create a macroeconomic theory different from classical theory because (a) he believed in government intervention in the economy. (b) he believed in the idea of the invisible hand. (c) monetary policy was more important than the classicals acknowledged. (d) classical theory was inconsistent with the data in the Great Depression. Keynes assumed that wages and prices were slow to adjust in order to explain (a) persistently high unemployment. (b) high inflation. (c) the high level of interest rates. (d) why inflation fell in recessions. How did Keynes propose to solve the problem of high unemployment? (a) Increase the growth rate of the money supply. (b) Allow wages to decline, so that firms will want to hire more workers. (c) Put on wage and price controls, so wages wont rise and firms wont have to lay people off to cut costs. (d) Have the government increase its demand for goods and services.

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The primary factor that caused some economists to lose their faith in the Keynesian approach to macroeconomic policy was (a) the high levels of unemployment that occurred during the Great Depression. (b) the presence of both high unemployment and high inflation during the 1970s. (c) the theoretical proof that Keyness ideas were invalid. (d) the evidence that Keyness ideas were useful during economic recessions, but not during economic booms.

Chapter 2
The Measurement and Structure of the National Economy
Multiple Choice Questions
1. The three approaches to measuring economic activity are the (a) cost, income, and expenditure approaches. (b) product, income, and expenditure approaches. (c) consumer, business, and government approaches. (d) private, public, and international approaches. The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made into gas. The Bigoil companys gas is sold for a total of $600 million. What is the total contribution to the countrys GDP from companies Bigdrill and Bigoil? (a) $200 million (b) $400 million (c) $600 million (d) $800 million Sams Semiconductors produces computer chips, which it sells for $10 million to Carls Computer Company (CCC). CCCs computers are sold for a total of $16 million. What is the value added to CCC? (a) $6 million (b) $10 million (c) $16 million (d) $26 million To ensure that the fundamental identity of national income accounting holds, changes in inventories are (a) treated as part of expenditure. (b) treated as part of saving. (c) ignored. (d) counted as consumption. To what extent are homemaking and child-rearing accounted for in the governments GDP accounts? (a) Not at all (b) Only to the extent that they are provided for pay (c) Only to the extent that taxes are paid on them (d) All homemaking and childrearing are accounted for

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Which of the following is included in U.S. GDP? (a) The sale of a new car from a manufacturers inventory (b) The purchase of a watch from a Swiss company (c) The sale of a used car (d) A newly constructed house Because government services are not sold in markets, (a) they are excluded from measurements of GDP. (b) the government tries to estimate their market value and uses this to measure the governments contribution to GDP. (c) they are valued at their cost of production. (d) taxes are used to value their contribution. Intermediate goods are (a) capital goods, which are used up in the production of other goods but were produced in earlier periods. (b) final goods that remain in inventories. (c) goods that are used up in the production of other goods in the same period that they were produced. (d) either capital goods or inventories. Capital goods are (a) a type of intermediate good. (b) final goods, because they are not used up during a given year. (c) produced in the same year as the related final good, whereas intermediate goods are produced in different years. (d) produced in one year, whereas final goods are produced over a period of more than one year. Marvins Metal Company produces screws that it sells to Ford, which uses the screws as a component of its cars. In the national income accounts, the screws are classified as (a) inventory. (b) final goods. (c) capital goods. (d) intermediate goods. Fred the farmer purchased five new tractors at $20,000 each. Fred sold his old tractors to other farmers for $50,000. The net increase in GDP of these transactions was (a) $50,000. (b) $100,000. (c) $125,000. (d) $150,000. GDP differs from GNP because (a) GDP GNP net factor payments from abroad. (b) GNP GDP net factor payments from abroad. (c) GDP GNP capital consumption allowances. (d) GNP GDP capital consumption allowances. If an American construction company built a road in Kuwait, this activity would be (a) excluded from U.S. GNP. (b) fully included in U.S. GDP. (c) included in U.S. GNP only for that portion that was attributable to American capital and labor. (d) included in U.S. GDP but not in U.S. GNP.

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If C $500, I $150, G $100, NX $40, and GNP $800, how much is NFP? (a) $10 (b) $5 (c) $5 (d) $10 The income-expenditure identity says that (a) Y C S T. (b) Y C I G. (c) Y C I G NX. (d) Y C I G NX CA. Which of the following is not a category of consumption spending in the national income accounts? (a) Consumer durables (b) Nondurable goods (c) Services (d) Housing purchases Consumer spending is spending by ___________ households on final goods and services produced ___________. (a) domestic; domestically and abroad (b) domestic; domestically (c) domestic and foreign; domestically and abroad (d) domestic and foreign; domestically Net national product equals (a) gross national product minus indirect business taxes. (b) gross national product minus depreciation. (c) national income minus indirect business taxes. (d) national income plus depreciation. Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. Monica consumed the remaining fish and coconuts. In terms of fish, total consumption by both Monica and Rachel would equal (a) 700 fish. (b) 900 fish. (c) 1100 fish. (d) 2700 fish. Private disposable income equals (a) GNP taxes transfers interest. (b) NNP taxes transfers interest. (c) national income taxes transfers interest. (d) national income taxes transfers interest. The value of a households assets minus the value of its liabilities is called (a) wealth. (b) income. (c) debt. (d) stock.

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If a local government collects taxes of $500,000, has $350,000 of government consumption expenditures, makes transfer payments of $100,000, and has no interest payments or investment, its budget would (a) show a surplus of $75,000. (b) show a surplus of $50,000. (c) be in balance with neither a surplus nor a deficit. (d) show a deficit of $75,000. The government budget surplus equals (a) government purchases plus transfers. (b) net government receipts minus government purchases. (c) government purchases minus net receipts. (d) government purchases minus transfers. The uses-of-saving identity says that an economys private saving is used for (a) investment, interest expenses, and the government budget deficit. (b) investment, the government budget deficit, and the current account. (c) investment, interest expenses, the government budget deficit, and the current account. (d) investment, interest expenses, the government budget deficit, transfer payments, and the current account. The uses-of-saving identity shows that if the government budget deficit rises, then one of the following must happen. (a) Private saving must rise, investment must fall, and/or the current account must fall. (b) Private saving must rise, investment must fall, and/or the current account must rise. (c) Private saving must rise, investment must rise, and/or the current account must fall. (d) Private saving must rise, investment must rise, and/or the current account must rise. In 2002, private saving was $1590 billion, investment was $1945 billion, and the current account balance was $489 billion. From the uses-of-saving identity, how much was government saving? (a) $134 billion (b) $844 billion (c) $844 billion (d) $134 billion In 2002, national saving was $1456 billion, investment was $1945 billion, and private saving was $1590 billion. How much was the current account balance? (a) $489 billion (b) $221 billion (c) $221 billion (d) $489 billion In the mid-to-late 1980s, the United States had twin deficits because both ___________ and ___________ were negative. (a) government saving; private saving (b) saving; investment (c) the current account; investment (d) government saving; the current account

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The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data, where quantities are in gallons and prices are dollars per gallon. Good Milk Butter 2003 Quantity Price 500 $2 2000 $1 2004 Quantity 900 3000 Price $3 $2

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Between 2003 and 2004, nominal GDP grew by (a) 60.0%. (b) 65.5%. (c) 83.3%. (d) 190.0%. The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data, where quantities are in gallons and prices are dollars per gallon. Good Milk Butter 2003 Quantity Price 500 $2 2000 $1 2004 Quantity 900 3000 Price $3 $2

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Between 2003 and 2004, the percent change in real GDP (based on 2003 as a base year) was (a) 58%. (b) 60%. (c) 130%. (d) 190%. The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data, where quantities are in gallons and prices are dollars per gallon. Good Milk Butter 2003 Quantity Price 500 $2 2000 $1 2004 Quantity 900 3000 Price $3 $2

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Between 2003 and 2004, the GDP deflator (based on 2003 as a base year) rose (a) 60.00%. (b) 81.25%. (c) 83.33%. (d) 123.00%. If nominal GDP for 2003 is $6400 billion and real GDP for 2004 is $6720 billion (in 2003 dollars), then the growth rate of real GDP is (a) 0%. (b) 0.5%. (c) 5%. (d) 50%. If the price index was 100 in 1990 and 120 in 2000, and nominal GDP was $360 billion in 1990 and $480 billion in 2000, then the value of 2000 GDP in terms of 1990 dollars would be (a) $300 billion.

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(b) $384 billion. (c) $400 billion. (d) $424 billion. Nominal GDP in 1970 was $1,035.6 billion, and in 1980 it was $2,784.2 billion. The GDP price index was 30.6 for 1970 and 60.4 for 1980, where 1992 was the base year. Calculate the percent change in real GDP in the decade from 1970 to 1980. Round off to the nearest percentage point. (a) 36% (b) 97% (c) 136% (d) 169% Nominal personal consumption expenditures in the United States were $1760.4 billion in 1980 and rose to $3839.3 billion in 1990. The price index for personal consumption expenditures was 58.5 for 1980 and 92.9 for 1990, where 1992 was the base year. Calculate the percent change in real personal consumption expenditures (rounded to the nearest percentage point) in the decade. (a) 37% (b) 59% (c) 118% (d) 137% The U.S. inflation rate ___________ in the 1960s and 1970s, ___________ in the 1980s, and ___________ in the 1990s. (a) was steady; rose sharply; fell (b) was steady; rose sharply; remained high (c) rose; fell sharply; remained low (d) rose; fell sharply; rose again In 2002 the GDP deflator for Old York was 300, and in 2004 it had risen to 330.75. Based on this information the annual average inflation rate for the two years was (a) 5%. (b) 5.125%. (c) 10%. (d) 10.25%. If the price index last year was 1.0 and today it is 1.4, what is the inflation rate over this period? (a) 4% (b) 1.4% (c) 4% (d) 40% You are given information on the consumer price index (CPI), where the values given are those for December 31 of each year. Year 1989 1990 1991 1992 1993 CPI 126.1 133.8 137.9 141.9 145.8

In which year was the inflation rate the highest?

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(a) 1990 (b) 1991 (c) 1992 (d) 1993 The consumer price index (CPI) was 180 for 2002 when using 1983 as the base year (1983 100). Now suppose we switch and use 2002 as the base year (2002 100). What is the CPI for 1983 with the new base year? (a) 18.0 (b) 55.6 (c) 80.0 (d) 111.2 The CPI may overstate inflation for all the following reasons EXCEPT (a) problems measuring changes in the quality of goods. (b) substitution by consumers towards cheaper goods. (c) problems measuring the quality of services. (d) changes in Social Security benefits. The nominal interest rate minus the inflation rate is the (a) depreciation rate. (b) real interest rate. (c) discount rate. (d) forward rate. By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal interest rate on the bond was ___________, and the real interest rate was ___________. (a) 9%; 1% (b) 9%; 1% (c) 36%; 24% (d) 36%; 12% The expected real interest rate (r) is equal to (a) nominal interest rate minus inflation rate. (b) nominal interest rate minus expected inflation rate. (c) expected nominal interest rate minus inflation rate. (d) nominal interest rate plus expected inflation rate. By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162, but he had thought the CPI would be at 159 by the end of the year. By Marks had expected the real interest rate to be ___________, but it actually turned out to be ___________. (a) 8%; 1% (b) 6%; 3% (c) 3%; 1% (d) 1%; 3%