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Econ 4200 Macroeconomics
Multiple Choice Questions for Midterm
82
Economics
03/03/2010

Additional Economics Flashcards

 


 

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Term

2.1 Fill in the blank for the following:

 

GDP is the value of all ________ produced in a given period.

A) final goods and services

B) final and intermediate goods and services, plus raw materials

C) final and intermediate goods and services produced by the private sector only

D) all of the above

E) none of the above

Definition

 

A) final goods and services

B) final and intermediate goods and services, plus raw materials

C) final and intermediate goods and services produced by the private sector only

D) all of the above

E) none of the above

Term

2.2 A firm's value added equals:

 

 

A) its revenue minus its cost of intermediate goods.

B) its revenue minus its wages and profit.

C) its revenue minus all of its costs.

D) its revenue minus its wages.

E) none of the above

Definition

 

A) its revenue minus its cost of intermediate goods.

B) its revenue minus its wages and profit.

C) its revenue minus all of its costs.

D) its revenue minus its wages.

E) none of the above

 

Term

2.3 When using the income approach to measure GDP, the largest share of GDP generally consists of:

 

A) labor income

B) indirect taxes

C) capital income

D) interest income

E) profits

Definition

 

A) labor income

B) indirect taxes

C) capital income

D) interest income

E) profits

Term

2.4 Suppose nominal GDP increased in a given year. Based on this information, we know with certainty that:

 

A) either real output or the price level (GDP deflator) have increased

B) real output has increased

C) the price level (GDP deflator) has increased

D) real output and the price level (GDP deflator) have both increased

E) real output has increased and the price level has decreased

Definition

 

A) either real output or the price level (GDP deflator) have increased

B) real output has increased

C) the price level (GDP deflator) has increased

D) real output and the price level (GDP deflator) have both increased

E) real output has increased and the price level has decreased

Term

2.5 An individual is said to be a discouraged worker if he or she

 

 

A) wants to work, and is actively searching for a job.

B) is working part time, but would prefer a full time job.

C)  is working, but prefers not to work.

D) is working in jobs she/he is not suited for.

E) wants to work, but has given up searching for a job.

Definition

 

A) wants to work, and is actively searching for a job.

B) is working part time, but would prefer a full time job.

C)  is working, but prefers not to work.

D) is working in jobs she/he is not suited for.

E) wants to work, but has given up searching for a job.

Term

2.6 The labor force in the United States is defined as:

 

 

A) the total number of individuals who are 16 years old and older, but not retired.

B) the sum of the total number of individuals who are employed and the officially unemployed.

C) the sum of the total number of individuals who are employed, the officially unemployed, and discouraged workers.

D) the total number of individuals who are employed.

E) none of the above.

Definition

 

A) the total number of individuals who are 16 years old and older, but not retired.

B) the sum of the total number of individuals who are employed and the officially unemployed.

C) the sum of the total number of individuals who are employed, the officially unemployed, and discouraged workers.

D) the total number of individuals who are employed.

E) none of the above.

Term

Suppose a country using the United States' system of calculating official unemployment statistics has 100 million people, of whom 50 million are working age. Of these 50 million, 20 million have jobs. Of the remainder: 10 million are actively searching for jobs; 10 million would like jobs but are not searching; and 10 million do not want jobs at all.

 

2.7 Refer to the information above. The official unemployment rate is

 

A) .66

B) .1

C) .4

D) .2

 E) .33

Definition

 

A) .66

B) .1

C) .4

D) .2

 E) .33

Term

2.8 The GDP deflator provides a measure of which of the following?

 

 

A) the price of a typical consumer's basket of goods.

B) the ratio of GDP to the size of the population.

C) the ratio of GDP to the number of workers employed.

D) the ratio of nominal GDP to real GDP.

E) real GDP divided by the aggregate price level.

Definition

 

A) the price of a typical consumer's basket of goods.

B) the ratio of GDP to the size of the population.

C) the ratio of GDP to the number of workers employed.

D) the ratio of nominal GDP to real GDP.

E) real GDP divided by the aggregate price level.

Term

2.9 The prices for which of the following goods are included in both the GDP deflator and the consumer price index?

 

 

A) goods bought by firms.

B) goods bought by households.

C) goods bought by foreign households (i.e., exports).

D) good bought by governments.

E) all of the above.

Definition

 

A) goods bought by firms.

B) goods bought by households.

C) goods bought by foreign households (i.e., exports).

D) good bought by governments.

E) all of the above.

Term

2.10 During the mid-1980s, we observed a significant reduction in oil prices. In the United States, we would expect that this reduction in oil prices would cause:

 

 

A) no change in the CPI and a reduction in the GDP deflator

B) a larger reduction in the CPI compared to the GDP deflator

C) a larger reduction in the GDP deflator compared to the CPI

D) an equal reduction in the CPI and GDP deflator

Definition

 

A) no change in the CPI and a reduction in the GDP deflator

B) a larger reduction in the CPI compared to the GDP deflator

C) a larger reduction in the GDP deflator compared to the CPI

D) an equal reduction in the CPI and GDP deflator

Term

2.11 Suppose nominal GDP in 2009 does not change (compared its previous level in 2008). Given this information, we know with certainty that:

 

 

A) the GDP deflator increased during 2009

B) more information is needed to answer this question

C) both the GDP deflator and real GDP fell during 2009

D) real GDP increased during 2009

Definition

 

A) the GDP deflator increased during 2009

B) more information is needed to answer this question

C) both the GDP deflator and real GDP fell during 2009

D) real GDP increased during 2009

Term

2.12 During the late 1990s, Japan experienced reductions in the GDP deflator. Given this information, we know with certainty that:

 

 

A) real GDP did not change during these periods

B) real GDP fell during these periods

C) the overall price level in Japan decreased during these periods

D) both real GDP and the overall price level decreased during these periods

Definition

 

A) real GDP did not change during these periods

B) real GDP fell during these periods

C) the overall price level in Japan decreased during these periods

D) both real GDP and the overall price level decreased during these periods

Term

3.1 Which of the following would NOT be considered part of fixed investment spending (I)?

 

 

A)  Exxon increases its inventories of unsold gasoline.

B)  Apple computer builds a new factory.

C)  an accountant buys a newly built home for herself and her family.

D)  Toyota buys a new robot for its automobile assembly line.

E)  all of the above.

Definition

  

A)  Exxon increases its inventories of unsold gasoline.

B)  Apple computer builds a new factory.

C)  an accountant buys a newly built home for herself and her family.

D)  Toyota buys a new robot for its automobile assembly line.

E)  all of the above.

Term

3.2 Which of the following is an exogenous variable in our model of the goods market in Chapter 3?

 

 

A)  government spending (G)

B)  saving (S)

C)  consumption (C)

D)  disposable income (YD)

E)  none of the above.

 

Definition

 

 

A)  government spending (G)

B)  saving (S)

C)  consumption (C)

D)  disposable income (YD)

E)  none of the above.

Term

3.3 Which of the following is an endogenous variable in our model of the goods market in Chapter 3?

 

 

A)  disposable income (YD)

B)  total income (Y)

C)  saving (S)

D)  consumption (C)

E)  all of the above.

 

Definition

 

 

A)  disposable income (YD)

B)  total income (Y)

C)  saving (S)

D)  consumption (C)

E)  all of the above.

Term

3.4 An economy is in equilibrium when which of the following conditions is satisfied?

 

 

A)  total saving equals investment.

B)  total saving equals zero.

C)  output equals consumption.

D)  consumption equals saving.

E)  all of the above.

Definition

 

A)  total saving equals investment.

B)  total saving equals zero.

C)  output equals consumption.

D)  consumption equals saving.

E)  all of the above.

Term

3.5 Suppose the consumption equation is represented by the following: C = 250 + .75YD. The multiplier in this economy is

 

 

A)  .25

B)  1

C)  .75

D)  5

E)  4

 

Definition

 

 

A)  .25

B)  1

C)  .75

D)  5

E)  4

Term

3.6 Suppose the consumption equation is represented by the following: C = 250 + .75YD. Given this information, the marginal propensity to save is

 

A)  1

B)  .7

C)  4

D)  .25

E)  none of the above.

Definition

 

A)  1

B)  .7

C)  4

D)  .25

E)  none of the above.

Term

3.7 Equilibrium in the goods market requires that

 

A)  consumption equals income.

B)  production equals income.

C)  consumption equals saving.

D)  government spending equals taxes minus transfers.

E)  production equals demand.

 

Definition

 

 

A)  consumption equals income.

B)  production equals income.

C)  consumption equals saving.

D)  government spending equals taxes minus transfers.

E)  production equals demand.

 

Term

3.8 Which of the following would tend to make the multiplier smaller?

 

A)  an increase in the marginal propensity to save.

B)  a reduction in government spending.

C)  a reduction in taxes.

D)  an increase in the marginal propensity to consume.

E)  none of the above.

Definition

 

A)  an increase in the marginal propensity to save.

B)  a reduction in government spending.

C)  a reduction in taxes.

D)  an increase in the marginal propensity to consume.

E)  none of the above.

Term

3.9 Based on our understanding of the paradox of saving, we know that a reduction in the desire to save will cause:

 

 

A)  a reduction in GDP.

B)  no change in equilibrium GDP.

C)  a permanent reduction in the level of saving.

D)  an increase in equilibrium GDP.

E)  an increase in the desire to invest.

 

Definition

 

 

A)  a reduction in GDP.

B)  no change in equilibrium GDP.

C)  a permanent reduction in the level of saving.

D)  an increase in equilibrium GDP.

E)  an increase in the desire to invest.

Term

3.10 Based on our understanding of the model presented in Chapter 3, we know that an increase in c1 (where C = c0 + c1YD) will cause:

 

A)  the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger effect on output

B)  the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a smaller effect on output

C)  the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output

D)  the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller effect on output

 

Definition

 

 

A)  the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger effect on output

B)  the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a smaller effect on output

C)  the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output

D)  the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller effect on output

Term

3.11 When a closed economy is in equilibrium, we know with certainty that

 

A)  I = S + (G-T)

B)  I = S + (T-G)

C)  I = S

D)  G = T and S = I

Definition

 

A)  I = S + (G-T)

B)  I = S + (T-G)

C)  I = S

D)  G = T and S = I

Term

3.12 An increase in the desire to save by households will cause:

 

A)  an increase in output

B)  no change in investment and no change in output

C)  a reduction in output

D)  a reduction in investment

Definition

 

A)  an increase in output

B)  no change in investment and no change in output

C)  a reduction in output

D)  a reduction in investment

Term

3.13 An increase in taxes will cause:

A)  a reduction in investment

B)  no change in investment

C)  no change in autonomous spending

D)  an increase in investment

Definition

 

A)  a reduction in investment

B)  no change in investment

C)  no change in autonomous spending

D)  an increase in investment

Term

4.1 Which of the following will cause an increase in the amount of money that one wishes to hold?

 

A)  a reduction in income.

B)  an increase in the interest rate increase.

C)  a reduction in the interest rate increase.

D)  none of the above

 

 

 

Definition

 

A)  a reduction in income.

B)  an increase in the interest rate increase.

C)  a reduction in the interest rate increase.

D)  none of the above

 

Term

4.2 The money demand curve will shift to the right when which of the following occurs?

 

 

A)  an increase in the money supply.

B)  a reduction in the interest rate.

C)  an increase in income.

D)  all of the above.

E)  none of the above.

 

Definition

 

 

A)  an increase in the money supply.

B)  a reduction in the interest rate.

C)  an increase in income.

D)  all of the above.

E)  none of the above.

Term

4.3 The interest rate will increase as a result of which of the following events?

 

A)  an open market purchase of bonds by the central bank.

B)  a reduction in income.

C)  an increase in income.

D)  all of the above.

E)  none of the above.

 

Definition

 

 

A)  an open market purchase of bonds by the central bank.

B)  a reduction in income.

C)  an increase in income.

D)  all of the above.

E)  none of the above.

 

Term

4.4 Which of the following generally occurs when a central bank pursues expansionary monetary policy?

 

A)  the central bank purchases bonds and the interest rate decreases.

B)  the central bank sells bonds and the interest rate decreases.

C)  the central bank sells bonds and the interest rate increases.

D)  the central bank purchases bonds and the interest rate increases.

 

Definition

 

 

A)  the central bank purchases bonds and the interest rate decreases.

B)  the central bank sells bonds and the interest rate decreases.

C)  the central bank sells bonds and the interest rate increases.

D)  the central bank purchases bonds and the interest rate increases.

Term

4.5 Which of the following generally occurs when a central bank pursues contractionary monetary policy?

 

A)  the central bank sells bonds and the interest rate increases.

B)  the central bank purchases bonds and the interest rate decreases.

C)  the central bank purchases bonds and the interest rate increases.

D)  the central bank sells bonds and the interest rate decreases.

Definition

 

A)  the central bank sells bonds and the interest rate increases.

B)  the central bank purchases bonds and the interest rate decreases.

C)  the central bank purchases bonds and the interest rate increases.

D)  the central bank sells bonds and the interest rate decreases.

Term

4.6 For this question, assume that individuals do NOT hold currency (i.e., c = 0). If the ratio of reserves to deposits is .10, the money multiplier is:

 

 

A)  5

B)  4

C)  .1

D)  .9

E)  10

Definition

 

 

A)  5

B)  4

C)  .1

D)  .9

E)  10

Term

4.7 An increase in income will tend to cause which of the following?

 

A)  a reduction in H

B)  a reduction in the money multiplier

C)  an increase in the monetary base (H)

D)  an increase in the interest rate

E)  none of the above

Definition

 

A)  a reduction in H

B)  a reduction in the money multiplier

C)  an increase in the monetary base (H)

D)  an increase in the interest rate

E)  none of the above

Term

4.8 An open market sale of securities will tend to cause:

 

A)  a reduction in the demand for currency

B)  a reduction in the demand for reserves

C)  a reduction in the supply of central bank money

D)  none of the above

 

Definition

 

 

A)  a reduction in the demand for currency

B)  a reduction in the demand for reserves

C)  a reduction in the supply of central bank money

D)  none of the above

Term

5.1 The IS curve represents:

 

A)  the combinations of output and the interest rate where the money market is in equilibrium.

B)  the combinations of output and the interest rate where the goods market is in equilibrium.

C)  the single level of output where the goods market is in equilibrium.

D)  the single level of output where financial markets are in equilibrium.

E)  none of the above.

 

Definition

 

A)  the combinations of output and the interest rate where the money market is in equilibrium.

B)  the combinations of output and the interest rate where the goods market is in equilibrium.

C)  the single level of output where the goods market is in equilibrium.

D)  the single level of output where financial markets are in equilibrium.

E)  none of the above.

Term

5.2 The IS curve will shift to the right when which of the following occurs?

 

A)  an increase in government spending.

B)  an increase in the money supply.

C)  a reduction in the interest rate.

D)  all of the above.

E)  none of the above.

 

Definition

 

 

A)  an increase in government spending.

B)  an increase in the money supply.

C)  a reduction in the interest rate.

D)  all of the above.

E)  none of the above.

Term

5.3 For each interest rate, the LM curve illustrates the level of output where:

 

A)  money supply equals money demand.

B)  inventory investment equals zero.

C)  the goods market is in equilibrium.

D)  all of the above.

E)  none of the above.

Definition

 

A)  money supply equals money demand.

B)  inventory investment equals zero.

C)  the goods market is in equilibrium.

D)  all of the above.

E)  none of the above.

Term

5.4 Which of the following statements is consistent with a given (i.e., fixed) LM curve?

 

A)  a reduction in the interest rate causes money demand to decrease.

B)  an increase in output causes an increase in money demand.

C)  an increase in output causes an increase in demand for goods.

D)  a reduction in the interest rate causes investment spending to increase.

E)  a reduction in the interest rate causes an increase in the money supply.

 

Definition

 

A)  a reduction in the interest rate causes money demand to decrease.

B)  an increase in output causes an increase in money demand.

C)  an increase in output causes an increase in demand for goods.

D)  a reduction in the interest rate causes investment spending to increase.

E)  a reduction in the interest rate causes an increase in the money supply.

Term

5.5 Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that

 

A)  the money, bond and goods markets are all in equilibrium.

B)  the money market and goods market are in equilibrium and the bond market is not in equilibrium.

C)  the money market and bond markets are in equilibrium and the goods market is not in equilibrium.

D)  the goods market is in equilibrium and the money market is not in equilibrium.

E)  neither the money, bond, nor goods markets are in equilibrium.

Definition

 

A)  the money, bond and goods markets are all in equilibrium.

B)  the money market and goods market are in equilibrium and the bond market is not in equilibrium.

C)  the money market and bond markets are in equilibrium and the goods market is not in equilibrium.

D)  the goods market is in equilibrium and the money market is not in equilibrium.

E)  neither the money, bond, nor goods markets are in equilibrium.

Term

5.6 Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the following to occur?

 

A)  the IS curve shifts and the economy moves along the LM curve.

B)  the LM curve shifts and the economy moves along the IS curve.

C)  both the IS and LM curves shift.

D)  neither the IS nor the LM curve shifts.

E)  output will change causing a change in money demand and a shift of the LM curve.

Definition

 

A)  the IS curve shifts and the economy moves along the LM curve.

B)  the LM curve shifts and the economy moves along the IS curve.

C)  both the IS and LM curves shift.

D)  neither the IS nor the LM curve shifts.

E)  output will change causing a change in money demand and a shift of the LM curve.

Term

5.7 In late 2007 and early 2008, the U.S. Federal Reserve pursued expansionary monetary policy. Which of the following will occur as a result of this monetary policy action?

 

A)  the LM curve shifts up.

B)  the IS curve shifts leftward as the interest rate increases.

C)  the LM curve shifts down.

D)  the IS curve shifts rightward as the interest rate falls.

E)  none of the above.

 

Definition

 

A)  the LM curve shifts up.

B)  the IS curve shifts leftward as the interest rate increases.

C)  the LM curve shifts down.

D)  the IS curve shifts rightward as the interest rate falls.

E)  none of the above.

Term

5.8 Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action.


 

A)  there will be no change in investment spending.

B)  investment spending may increase, decrease, or not change.

C)  investment spending will increase.

D)  investment spending will decrease.

E)  none of the above.

 

Definition

 

A)  there will be no change in investment spending.

B)  investment spending may increase, decrease, or not change.

C)  investment spending will increase.

D)  investment spending will decrease.

E)  none of the above.

Term

5.9 Suppose investment spending is NOT very sensitive to the interest rate. Given this information, we know that:

 

A)  the LM curve should be relatively flat.

B)  the IS curve should be relatively steep.

C)  neither the IS nor the LM curve will be affected.

D)  the LM curve should be relatively steep.

E)  the IS curve should be relatively flat.

Definition

 

A)  the LM curve should be relatively flat.

B)  the IS curve should be relatively steep.

C)  neither the IS nor the LM curve will be affected.

D)  the LM curve should be relatively steep.

E)  the IS curve should be relatively flat.

Term

5.10 Which of the following is the definition for the real supply of money?

 

A)  the stock of high powered money only.

B)  the real value of currency in circulation only.

C)  the stock of money measured in terms of goods, not dollars.

D)  the actual quantity of money, rather than the officially reported quantity.

E)  the ratio of the real GDP to the nominal money supply

Definition

 

A)  the stock of high powered money only.

B)  the real value of currency in circulation only.

C)  the stock of money measured in terms of goods, not dollars.

D)  the actual quantity of money, rather than the officially reported quantity.

E)  the ratio of the real GDP to the nominal money supply

Term

5.11 Suppose there is a fiscal contraction. Which of the following is a complete list of the variables that must decrease?

 

A)  consumption, output and the interest rate.

B)  consumption.

C)  consumption and investment.

D)  consumption and output.

E)  consumption, output and investment.

 

Definition

 

 

A)  consumption, output and the interest rate.

B)  consumption.

C)  consumption and investment.

D)  consumption and output.

E)  consumption, output and investment.

Term

5.12 Suppose there is a simultaneous fiscal expansion and monetary contraction. We know with certainty that:

 

A)  both output and the interest rate will increase.

B)  the interest rate will increase.

C)  the interest rate will decrease.

D)  output will decrease.

E)  output will increase.

Definition

 

A)  both output and the interest rate will increase.

B)  the interest rate will increase.

C)  the interest rate will decrease.

D)  output will decrease.

E)  output will increase.

Term

5.13 Suppose there is a simultaneous fiscal expansion and monetary expansion. We know with certainty that:

 

 

A)  both output and the interest rate will increase.

B)  output will decrease.

C)  the interest rate will increase.

D)  the interest rate will decrease.

E)  output will increase.

Definition

 

 

A)  both output and the interest rate will increase.

B)  output will decrease.

C)  the interest rate will increase.

D)  the interest rate will decrease.

E)  output will increase.

Term

5.14 Suppose the demand for money is NOT very sensitive to the interest rate. Given this information, we know that:

 

A)  the LM curve should be relatively steep.

B)  neither the IS nor the LM curve will be affected.

C)  the IS curve should be relatively steep.

D)  the LM curve should be relatively flat.

E)  the IS curve should be relatively flat.

Definition

 

A)  the LM curve should be relatively steep.

B)  neither the IS nor the LM curve will be affected.

C)  the IS curve should be relatively steep.

D)  the LM curve should be relatively flat.

E)  the IS curve should be relatively flat.

Term

5.15 During 2008 in the United States, consumer confidence fell significantly. Which of the following will occur as a result of this reduction in consumer confidence?

 

 

A)  the IS curve will shift leftward.

B)  the LM curve will shift up.

C)  the LM curve will shift down.

D)  the IS curve will shift rightward.

E)  the IS curve will shift rightward, and the LM curve will shift up.

Definition

 

A)  the IS curve will shift leftward.

B)  the LM curve will shift up.

C)  the LM curve will shift down.

D)  the IS curve will shift rightward.

E)  the IS curve will shift rightward, and the LM curve will shift up.

 

Term

5.16 A Fed purchase of securities will most likely have which of the following effects?

 

 

A)  a leftward shift in the IS curve

B)  a downward shift in the LM curve

C)  an upward shift in the LM curve

D)  a rightward shift in the IS curve

 

Definition

 

 

A)  a leftward shift in the IS curve

B)  a downward shift in the LM curve

C)  an upward shift in the LM curve

D)  a rightward shift in the IS curve

Term

5.17 The IS curve will NOT shift when which of the following occurs?

 

 

A)  a reduction in consumer confidence.

B)  a reduction in the interest rate.

C)  a reduction in government spending.

D)  all of the above.

E)  none of the above.

 

 

 

Definition

 

A)  a reduction in consumer confidence.

B)  a reduction in the interest rate.

C)  a reduction in government spending.

D)  all of the above.

E)  none of the above.

 

Term

6.1 Data on labor-force flows show that

 

A)  the average duration of unemployment is about 2 years.

B)  in any given month, almost all of the unemployed gets jobs.

C)  the average duration of unemployment is about 2 weeks.

D)  in any given month, almost none of the unemployed gets jobs.

E)  in any given month, about one-fourth of the unemployed get jobs.

Definition

 

A)  the average duration of unemployment is about 2 years.

B)  in any given month, almost all of the unemployed gets jobs.

C)  the average duration of unemployment is about 2 weeks.

D)  in any given month, almost none of the unemployed gets jobs.

E)  in any given month, about one-fourth of the unemployed get jobs.

Term

6.2 Which of the following statements about wage setting is true?

 

A)  most workers in the U.S. have their wages set by formal contracts.

B)  the minimum wage in the U.S. is about 75% of the average wage.

C)  formal contracts play a more important role in Japan and Western Europe than in the United States.

D)  all of the above.

 

Definition

 

 

A)  most workers in the U.S. have their wages set by formal contracts.

B)  the minimum wage in the U.S. is about 75% of the average wage.

C)  formal contracts play a more important role in Japan and Western Europe than in the United States.

D)  all of the above.

 

Term

6.3 Efficiency wage theory suggests that

 

A)  productivity might drop if the wage rate is too low.

B)  the government can only set tax rates so high before people will prefer not to work.

C)  firms will be more resistant to wage increases as the labor market tightens.

D)  unskilled workers will have a lower turnover rate than skilled workers.

E)  workers will be paid less than their reservation wage.

Definition

 

A)  productivity might drop if the wage rate is too low.

B)  the government can only set tax rates so high before people will prefer not to work.

C)  firms will be more resistant to wage increases as the labor market tightens.

D)  unskilled workers will have a lower turnover rate than skilled workers.

E)  workers will be paid less than their reservation wage.

Term

6.4 In the wage-setting relation, the nominal wage tends to decrease when

 

A)  unemployment benefits decrease.

B)  the minimum wage increases.

C)  the unemployment rate decreases.

D)  the price level increases.

E)  all of the above.

 

Definition

 

 

A)  unemployment benefits decrease.

B)  the minimum wage increases.

C)  the unemployment rate decreases.

D)  the price level increases.

E)  all of the above.

Term

6.5 Labor productivity is represented by which of the following?

 

A)  the ratio of output to the labor force.

B)  workers per unit of capital.

C)  the ratio of output to employment.

D)  capital per worker.

E)  the ratio of output to population.

 

Definition

 

 

A)  the ratio of output to the labor force.

B)  workers per unit of capital.

C)  the ratio of output to employment.

D)  capital per worker.

E)  the ratio of output to population.

 

Term

6.6 The natural level of output is the level of output that occurs when

 

A)  the economy is operating at the unemployment rate consistent with both the wage-setting and price-setting equations.

 

B)  the markup (μ) is zero.

C)  there are no discouraged workers in the economy.

D)  the unemployment rate is zero.

E)  the goods market and financial markets are in equilibrium.

 

Definition

 

 A)  the economy is operating at the unemployment rate consistent with both the wage-setting and price-setting equations.

B)  the markup (μ) is zero.

C)  there are no discouraged workers in the economy.

D)  the unemployment rate is zero.

E)  the goods market and financial markets are in equilibrium.

 

Term

6.7 The natural level of employment (N) will increase when which of the following occurs?

 

 

A)  an increase in the markup of prices over costs.

B)  an increase in the actual unemployment rate.

C)  a reduction in unemployment benefits.

D)  all of the above.

E)  none of the above.

 

Definition

 

 

A)  an increase in the markup of prices over costs.

B)  an increase in the actual unemployment rate.

C)  a reduction in unemployment benefits.

D)  all of the above.

E)  none of the above.

Term

6.8 When the unemployment rate is low, we would expect that:

 

 

A)  the probability of losing a job is high

B)  the probability of losing a job is low

C)  the separation rate will increase

D)  the probability an unemployed individual will find another job is low 

Definition

 

 

A)  the probability of losing a job is high

B)  the probability of losing a job is low

C)  the separation rate will increase

D)  the probability an unemployed individual will find another job is low 

Term

6.9 Suppose workers and firms expect the overall price level to increase by 5%. Given this information, we would expect that:

 

A)  the nominal wage will increase by less than 5%

B)  the real wage will increase by less than 5%

C)  the nominal wage will increase by exactly 5%

D)  the real wage will increase by 5%

E)  the nominal wage will increase by more than 5%

Definition

 

A)  the nominal wage will increase by less than 5%

B)  the real wage will increase by less than 5%

C)  the nominal wage will increase by exactly 5%

D)  the real wage will increase by 5%

E)  the nominal wage will increase by more than 5%

Term

6.10 The labor force is defined as:

 

 

A)  the total number employed

B)  the sum of the number of employed, unemployed and discouraged individuals

C)  the total number of working age individuals in the population

D)  the sum of the employed and unemployed

Definition

 

 

A)  the total number employed

B)  the sum of the number of employed, unemployed and discouraged individuals

C)  the total number of working age individuals in the population

D)  the sum of the employed and unemployed

Term

6.11 Which of the following represents the participation rate?

 

A)  the ratio of the number employed to the size of the labor force

B)  the ratio of the labor force to the civilian non-institutional population

C)  the ratio of the number employed to the civilian non-institutional population

D)  the ratio of the labor force to the total number of employed and unemployed workers

Definition

 

A)  the ratio of the number employed to the size of the labor force

B)  the ratio of the labor force to the civilian non-institutional population

C)  the ratio of the number employed to the civilian non-institutional population

D)  the ratio of the labor force to the total number of employed and unemployed workers

Term

6.12 Suppose the actual unemployment rate increases. This will cause:

A)  a movement along the WS and the PS curves

B)  a downward shift in the WS curve

C)  an upward shift in the WS curve

D)  an upward shift in the PS curve

E)  none of the above

Definition

 

 

A)  a movement along the WS and the PS curves

B)  a downward shift in the WS curve

C)  an upward shift in the WS curve

D)  an upward shift in the PS curve

E)  none of the above

Term

6.13 Based on wage setting behavior, we know that a reduction in the unemployment rate will cause: 

A)  no change in the real wage

B)  an upward shift of the WS curve

C)  an increase in the real wage

D)  a reduction in the real wage

Definition

 

 

A)  no change in the real wage

B)  an upward shift of the WS curve

C)  an increase in the real wage

D)  a reduction in the real wage

Term

6.14 Based on price setting behavior, we know that a reduction in the unemployment rate will cause:

A)  an increase in the real wage

B)  no change in the real wage

C)  a reduction in the real wage

D)  an upward shift of the PS curve

Definition

 

 

A)  an increase in the real wage

B)  no change in the real wage

C)  a reduction in the real wage

D)  an upward shift of the PS curve

Term

6.15 Suppose the aggregate production function is given by the following: Y = N. Given this information, we know that labor productivity is represented by the following:

 

A)  N

B)  N/Y

C)  1/N

D)  1

 

Definition

 

 

A)  N

B)  N/Y

C)  1/N

D)  1

 

Term

6.16 An increase in the minimum wage will tend to cause which of the following?

 

A)  an upward shift in the PS curve

B)  an upward shift in the WS curve

C)  a downward shift in the PS curve

D)  a downward shift in the WS curve

E)  none of the above

 

Definition

 

 

A)  an upward shift in the PS curve

B)  an upward shift in the WS curve

C)  a downward shift in the PS curve

D)  a downward shift in the WS curve

E)  none of the above

 

Term

6.17 Suppose that increased international trade makes product markets more competitive in the U.S. Given this information, we would expect to observe which of the following?

 

A)  a downward shift in the WS curve

B)  an upward shift in the PS curve

C)  a downward shift in the PS curve

D)  an upward shift in the WS curve

E)  none of the above

 

Definition

 

 

A)  a downward shift in the WS curve

B)  an upward shift in the PS curve

C)  a downward shift in the PS curve

D)  an upward shift in the WS curve

E)  none of the above

 

Term

7.1 Based on the aggregate supply relation, an increase in current output will cause:

 

A)  an increase in the markup over labor costs.

B)  a change in the expected price level this year.

C)  an increase in the expected price level and an upward shift of the AS curve.

D)  an increase in the current price level.

E)  a shift of the aggregate supply curve.

Definition

A)  an increase in the markup over labor costs.

B)  a change in the expected price level this year.

C)  an increase in the expected price level and an upward shift of the AS curve.

D)  an increase in the current price level.

E)  a shift of the aggregate supply curve.

Term

7.2 When the current price level is equal to the expected price level, we know that:

 

A)  the unemployment rate is zero.

B)  the money market is in equilibrium.

C)  the output is equal to the natural level of output.

D)  the goods market and financial markets are in equilibrium.

E)  none of the above.

Definition

 

A)  the unemployment rate is zero.

B)  the money market is in equilibrium.

C)  the output is equal to the natural level of output.

D)  the goods market and financial markets are in equilibrium.

E)  none of the above.

Term

7.3 In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on:

 

A)  government spending.

B)  firms' markup over labor costs.

C)  the money market and, subsequently, investment.

D)  the expected price level.

   E)  the nominal wage.

 

 

Definition

 

 

A)  government spending.

B)  firms' markup over labor costs.

C)  the money market and, subsequently, investment.

D)  the expected price level.

   E)  the nominal wage.

Term

7.4 The aggregate demand curve will shift to the right when which of the following occurs?

 

A)  a reduction in taxes.

B)  a reduction in the money supply.

C)  a rise in the price level.

D)  a decrease in the price level.

E)  a reduction in consumer confidence.

 

Definition

 

 

A)  a reduction in taxes.

B)  a reduction in the money supply.

C)  a rise in the price level.

D)  a decrease in the price level.

E)  a reduction in consumer confidence.

 

Term

7.5 Which of the following represents a short-run effect of a monetary expansion?

 

 

A)  an increase in the price level.

B)  an increase in output.

C)  a reduction in the interest rate.

D)  all of the above.

E)  none of the above.

Definition

 

 

A)  an increase in the price level.

B)  an increase in output.

C)  a reduction in the interest rate.

D)  all of the above.

E)  none of the above.

Term

7.6 Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for an increase in government spending. This increase in government spending will, in the short run, cause an increase in

 

 

A)  the price level.

B)  the interest rate.

C)  the nominal wage.

D)  all of the above.

E)  none of the above.

Definition

 

 

A)  the price level.

B)  the interest rate.

C)  the nominal wage.

D)  all of the above.

E)  none of the above.

Term

7.7 Assume the economy is initially operating at the natural level of output. Which of the following events will NOT change the composition of output (i.e., the percentage of GDP composed of consumption, investment, ... etc.) in the medium run?

 

A)  An increase in consumer confidence.

B)  An increase in the money supply.

C)  A cut in taxes.

D)  A reduction in government spending.

E)  A reduction in the desire to save.

Definition

 

A)  An increase in consumer confidence.

B)  An increase in the money supply.

C)  A cut in taxes.

D)  A reduction in government spending.

E)  A reduction in the desire to save.

Term

7.8 Answer this question using the AS/AD model presented in the textbook. Which of the following would cause a reduction in the natural level of output in the medium run?

 

A)  a decrease in government spending.

B)  a decrease in the money supply.

C)  an increase in taxes.

D)  both A and C.

E)  none of the above.

Definition

 

A)  a decrease in government spending.

B)  a decrease in the money supply.

C)  an increase in taxes.

D)  both A and C.

E)  none of the above.

Term

7.9 The aggregate demand (AD) curve presented in the textbook has its particular shape because of which of the following explanations?

 

A)  an increase in the money supply (M) will cause a reduction in the interest rate, an increase in investment, and an increase in output

B)  as P decreases in a closed economy, goods and services become relatively cheaper and individuals respond by increasing the quantity demanded of goods and services

C)  an increase in P will cause a reduction in the real wage, an increase in employment, and an increase in output

D)  an increase in the aggregate price level (P) will cause an increase in the interest rate and a reduction in output

Definition

 

A)  an increase in the money supply (M) will cause a reduction in the interest rate, an increase in investment, and an increase in output

B)  as P decreases in a closed economy, goods and services become relatively cheaper and individuals respond by increasing the quantity demanded of goods and services

C)  an increase in P will cause a reduction in the real wage, an increase in employment, and an increase in output

D)  an increase in the aggregate price level (P) will cause an increase in the interest rate and a reduction in output

Term

7.10 The short-run aggregate supply curve (AS) presented in the textbook has its particular shape because of which of the following explanations?

 

A)  a drop in the nominal wage causes an increase in the amount of output that firms are willing to produce

B)  a reduction in the aggregate price level will cause a reduction in the interest rate and an increase in output

C)  an increase in the aggregate price level causes an increase in nominal money demand and an increase in the interest rate

D)  a reduction in output causes a reduction in employment, an increase in unemployment, a reduction in the nominal wage and a reduction in the price level

Definition

 

A)  a drop in the nominal wage causes an increase in the amount of output that firms are willing to produce

B)  a reduction in the aggregate price level will cause a reduction in the interest rate and an increase in output

C)  an increase in the aggregate price level causes an increase in nominal money demand and an increase in the interest rate

D)  a reduction in output causes a reduction in employment, an increase in unemployment, a reduction in the nominal wage and a reduction in the price level

Term

7.11 Which of the following events will cause an increase in the aggregate price level?

A)  an increase in the unemployment rate

 

B)  a reduction in Pe

C)  a reduction in the markup

D)  an increase in the unemployment benefits

E)  none of the above

 

 

Definition

A)  an increase in the unemployment rate

B)  a reduction in Pe

C)  a reduction in the markup

D)  an increase in the unemployment benefits

E)  none of the above

Term

7.12 If u < un, we know with certainty that

 

A)  Y < Yn

B)  P > Pe

C)  P < Pe

D)  P = Pe

 

Definition

 

 

A)  Y < Yn

B)  P > Pe

C)  P < Pe

D)  P = Pe

 

Term

7.13 For this question, assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following?

 

A)  an increase in the aggregate price level, no change in output and no change in the interest rate in the medium run

B)  an increase in investment in the medium run

C)  a reduction in output and no change in the aggregate price level in the short run

D)  a reduction in employment and no change in the nominal wage in the short run

Definition

 

A)  an increase in the aggregate price level, no change in output and no change in the interest rate in the medium run

B)  an increase in investment in the medium run

C)  a reduction in output and no change in the aggregate price level in the short run

D)  a reduction in employment and no change in the nominal wage in the short run

Term

7.14 If Y < Yn, we know with certainty that:

 

A)  P > Pe

B)  u < un

C)  P = Pe

D)  P < Pe

 

 

 

Definition

 

 

A)  P > Pe

B)  u < un

C)  P = Pe

D)  P < Pe

Term

7.15 Suppose the minimum wage decreases. Given this event, we would expect which of the following to occur?

A)  an increase in the aggregate price level as output increases

B)  an increase in the interest rate in the medium run

C)  a reduction in the price level and an increase in output in the medium run

D)  none of the above

Definition

 

A)  an increase in the aggregate price level as output increases

B)  an increase in the interest rate in the medium run

C)  a reduction in the price level and an increase in output in the medium run

D)  none of the above