There are five short answer questions on the test similar to these.
1. Which term best describes the price change from year 1 to year 2? From year 2 to year 3? Why?
2. Why do economists believe that when the producer price index rises, there is a good chance that the consumer price index will follow with a lag?
3. Suppose you have a contract that specifies that your salary will be increased annually with inflation, as measured by the CPI. Suppose the CPI rose from 110 to 121 last year. By how much would your income go up? Would you be happy if the rate of inflation were accelerating? Why or why not?
4. What are some of the effects of hyperinflation? What are some of its causes?
Answer Key
1. The price level is the absolute level of a price index, or measure of the average prices in an economy. Inflation occurs when prices on average (the price index) rise. Disinflation occurs when prices rise but at a declining rate. Deflation is a drop in the price level and hyperinflation is a rate of inflation so high that prices more than double every year. The price level rises from year 1 to year 2, indicating that the economy experienced inflation but not hyperinflation. Between year 2 and year 3 the price level dropped, so deflation was present.
3. Many of the items included in the PPI represent revenue when businesses sell to other businesses. Hence, it is an indicator of costs businesses face. If business costs rise, firms will try to raise prices to the final consumers and the CPI will rise.
4. The rate of inflation is (121 – 110)/110, or 10%. According to the contract, you will receive a 10% salary increase. If the rate of inflation is accelerating, then your purchasing power is decreasing. The reason is that there is a lag between when the inflation occurs and when the salary increase is implemented.
6. Hyperinflation occurs when prices rise at a very rapid rate—even daily or hourly. Although several countries experienced it, Germany in the 1920s is one of the worst cases. German workers were paid twice a day so that they could get to the stores before prices rose. Much time and energy was expended in bookkeeping to keep track of price changes. The cause of the hyperinflation in Germany was the government printing money to pay the reparations imposed on it from World War I. The result was a breakdown in the economic and political system, which opened the way for the rise of Hitler.
Multiple Choice
1. The Establishment Survey asks questions about employment in:
A) the agricultural industry.
B) manufacturing and the service industry.
C) Wall Street establishment firms.
D) households.
2. Which of the following statements about discouraged workers is NOT correct?
A) Discouraged workers have stopped actively seeking work.
B) Discouraged workers are not classified as unemployed.
C) Discouraged workers are considered underemployed.
D) Discouraged workers are considered part of the leisure class, not part of the labor force.
3. The measure of the average change in prices paid by urban consumers for a typical market basket of goods is called the:
A) GDP deflator.
B) producer price index.
C) personal consumption expenditures index.
D) consumer price index.
4. Which statement is correct?
A) The CPI's basket is based on what consumers purchase while the PCE's basket is based on what the economy produces.
B) The CPI and PCE give very different views on the rate of inflation.
C) Business spending on employee health benefits is included in the CPI but not the PCE.
D) Most economists agree that the PCE is a much better indicator than the CPI.
5. Which of the following statements regarding the CPI is NOT correct?
A) The CPI is a true cost of living measure.
B) The CPI measures the average change in prices paid by urban consumers.
C) The CPI is a conditional cost-of-goods index.
D) The CPI must be adjusted for quality changes in products.
6. Measuring changes in a fixed basket of goods is a method of measuring changes in price.
A) cost-of-goods index
B) cost-of-living index
C) cost-of-production
D) utility maximization
7. The period of U.S. history that represented the highest rate of inflation was:
A) the Great Depression.
B) World War II.
C) the 1970s.
D) the 1980s.
8. Which of the following statements regarding the types of unemployment is true?
A) Frictional unemployment is generally short-term, whereas structural unemployment is often long-term.
B) Cyclical unemployment is due to expansions in the business cycle.
C) Frictional unemployment is brought about by changes in technology.
D) Structural unemployment is the result of normal labor turnover.
9. U.S. unemployment rates for 1980–2000 show:
A) workers under age 24 with lower unemployment rates than older workers.
B) higher unemployment rates for whites than for blacks and Hispanics.
C) unemployment rates for college graduates to average 4%.
D) a drop in the total unemployment rate.
10. The GDP deflator for the base year is:
A) less than 100.
B) always equal to 100.
C) greater than 100.
D) dependent on the quantities of output and the prices at which outputs are sold in the base year.
Answer Key Ch. 16 Multiple Choice Test
1. B
2. C
3. D
4. A
5. A
6. A
7. B
8. A
9. D
10. B
I am incorporating true/ false questions into this test. These questions are from the quiz given last Wednesday. The test will have similar questions.
AP Economics Ch. 16 T/F Quiz
1. Inflation is a measure of the changes in the cost of production.
A) True
B) False
2. The Bureau of Labor Standards collects a random sample of different goods and services every month in order to achieve statistical uniformity.
A) True
B) False
3. Use of the GDP deflator allows economists to estimate the real rate of growth of the economy.
A) True
B) False
4. If the nominal GDP rose by 5% and the GDP deflator also rose by 5%, then the real GDP is unchanged.
A) True
B) False
5. Unemployment rates differ little by education, age, or ethnic group.
A) True
B) False
6. Young females have a higher unemployment rate than young males.
A) True
B) False
7. A person is considered to be unemployed if he or she has been either actively or passively looking for work.
A) True
B) False
8. Underemployed workers are workers who have the desire and ability to contribute significantly more to GDP but are in jobs where they cannot do so.
A) True
B) False
9. The presence of discouraged workers tends to cause the official unemployment rate to understate the actual rate.
A) True
B) False
10. The goal of unemployment policy is to eliminate frictional unemployment.
A) True
B) False
CH. 16 T/F Quiz Answer Key
1. B
2. B
3. A
4. A
5. B
6. B
7. B
8. A
9. A
10. B
Macro Economics
Introduction to Macro Economics
Please go over the assignment given in class. For further help, I have posted a study guide, with answers, to help study for the test.
The test will be a combination of multiple choice and short answers.
There are four Short Answer questions on the Quiz.
You will be expected to write a short paragraph, i.e., a short answer, for each one.
You will need to define macroeconomics and its variables, know the parts of the business cycle, the trendline, "micro" recessions, the simple circular flow model, apply the simple circular flow model based on figures provided in the problem, NIPA, the income approach calculating GDP, owners of factors of production, adjustments made to convert national income to GDP, compare the GDPs of more than one country, and related topics based on your notes from Ch. 15.
1. What is macroeconomics and what are some of the major variables it analyzes?
2. Describe the parts of a typical business cycle. How does the business cycle differ from the trendline?
3. Explain why some economists believe that the U.S. economy has been experiencing “micro” recessions. What are some reasons for this development?
4. Using the simple circular flow model, explain why the sum of income earned in an economy equals the sum of spending in the economy.
Answer Key
1. Macroeconomics looks at an economy as a whole rather than its individual industries and markets. It steps back and looks at the overall health of the economy. The major variables it tracks include gross domestic product, the unemployment rate, and inflation.
2. The business cycle has two main phases—contraction and expansion. Starting at the peak, economic activity contracts and the economy slides into a recession or downturn. Economic activity hits bottom at the trough and picks up as the economy goes into a recovery. The expansion continues until the economy reaches the peak. The trend is the long-term direction of an economy's growth while the business cycle focuses on the short-term ebbs and flows of economic activity.
3. Since the early 1980s, the periods of expansion have been getting longer and the recessions shorter and less severe. For example, in the 30 years prior to 1983, the economy had seven recessions lasting an average of eleven months. Since 1983 there have been two recessions lasting an average of eight months. A downside to this development is that recoveries have been getting weaker. Some reasons for the change is that businesses have used new technologies (such as computers) and management techniques (such as supply chain management) and have focused more on producing services.
4. The circular flow shows that households earn income, which is then used to purchase the goods and services firms produce. The cycle is complete when the sales revenue is used to pay labor and other resources for their productive services. Since the funds used by firms to pay income come from the funds used for the purchase of goods and services, aggregate income and expenditures are equal. A simple example would be the purchase of an automobile for $20,000. Expenditure (from the buyer's perspective) is $20,000 and income (from the seller's perspective) is $20,000.
1. An example of an indicator tracked by macroeconomists is:
A) the price of apples.
B) gross domestic product.
C) employment in the mining industry.
D) the production of laptops.
2. The Great Depression:
A) occurred in the period before World War I.
B) led economists to begin studying macroeconomic activity.
C) was caused by hyperinflation.
D) can be cured by administering Prozac to the entire population.
3. Major macroeconomic data in the early 1980s show:
A) high unemployment and high inflation.
B) high unemployment and low inflation.
C) low unemployment and high inflation.
D) low unemployment and low inflation.
4. A recession historically lasts between:
A) 6 and 16 months.
B) 2 and 4 years.
C) 1 and 11 years.
D) 2 and 3 months.
5. During a typical economic recovery:
A) inflation drops.
B) people become pessimistic.
C) unemployment drops.
D) incomes fall.
6. Which organization dates business cycles?
A) Federal Reserve
B) National Bureau of Economic Research
C) Bureau of Commerce and Labor Department
D) Bureau of Economic Analysis
20. Since 1983, the intensity of the business cycle has been reduced due to all but which of the following factors?
A) reduction in the size of the budget deficit relative to real GDP
B) better supply chain management
C) increasing shift to a service economy
D) technological improvements in computers and communications
7. In the last few decades, recessions have been becoming less pronounced. However, at the same time:
A) rising interest rates have reduced the strength of the expansions.
B) inflation has rapidly accelerated.
C) fewer jobs have been created during economic recoveries.
D) the unemployment rate has risen considerably during periods of expansion.
8. Which of the following changes is a reason for the recent change in the characteristics of business cycles?
A) innovations in supply chain management
B) shift to manufacturing in the GDP
C) increasing effectiveness of trade barriers
D) global warming
9. The event that stimulated the U.S. government's commitment to tracking the economy's health through a national income accounting system was the:
A) Civil War and Reconstruction.
B) Panic of 1907.
C) Great Depression.
D) Oil Embargo of 1973.
10. Simon Kuznets:
A) created the gross national product as a way of measuring a nation's economic output.
B) created the National Bureau of Economic Research.
C) was Secretary of Treasury during World War II.
D) created the hair net.
11. The two approaches used by government in estimating GDP are:
A) statistical and nonstatistical.
B) survey and nonsurvey.
C) income and earnings.
D) expenditure and income.
12. A sheep ranch produces $30 worth of wool. A suit manufacturer produces $60 worth of suits. A retail outlet sells a suit to a customer for $180. The GDP would be:
A) $30.
B) $180.
C) $270.
D) zero, because wool suits are worthless.
13. Which of the following items would be a durable good?
A) college education
B) horseradish
C) refrigerator
D) Mohawk hair cut
14. Economists believe that changes in investment spending are important for forecasting the business cycle because:
A) increases in investment spending raise tax revenues, which allows government to spend more.
B) investment closely reflect consumer sentiment.
C) changes in inventory show where the economy has been.
D) investment is a key determinant of economic growth.
15. What component of American GDP is usually negative in boom years?
A) consumption
B) investment
C) government spending
D) net exports
16. Which equation summarizes the expenditures approach to measuring GDP?
A) Y = C + S
B) total spending = total income
C) GDP = C + I + G + (X – M)
D) GDP = NDP + depreciation
17. Which of the following statements does NOT describe an adjustment to national income to obtain GDP?
A) Net exports are added to national income.
B) A capital consumption allowance is added to national income.
C) Income payments from the rest of the world are added to national income.
D) Payments U.S. corporations and residents send to foreign residents are subtracted from national income.
18. Net domestic product measures:
A) C + I + G + (X – M).
B) GDP minus depreciation.
C) GDP plus income payments from the rest of the world minus income payments to the rest of the world.
D) national income plus income payments from the rest of the world minus income payments to the rest of the world.
19. Which of the following two things can people do with money received as disposable personal income?
A) pay taxes or put money into savings
B) pay taxes or spend the money
C) spend the money or put money into savings
D) pay taxes or buy government bonds
20. Schumpeter's term “creative destruction” describes the:
A) Luddite's destruction of machines.
B) innovative dynamism of capitalism.
C) working class movement of communism.
D) destruction of buildings.
Answer Key
1. B
2. B
3. A
4. A
5. C
6. B
7. A
8. A
9. C
10. A
11. D
12. B
13. C
14. D
15. D
16. C
17. A
18. B
19. C
20. B
The test will be a combination of multiple choice and short answers.
There are four Short Answer questions on the Quiz.
You will be expected to write a short paragraph, i.e., a short answer, for each one.
You will need to define macroeconomics and its variables, know the parts of the business cycle, the trendline, "micro" recessions, the simple circular flow model, apply the simple circular flow model based on figures provided in the problem, NIPA, the income approach calculating GDP, owners of factors of production, adjustments made to convert national income to GDP, compare the GDPs of more than one country, and related topics based on your notes from Ch. 15.
1. What is macroeconomics and what are some of the major variables it analyzes?
2. Describe the parts of a typical business cycle. How does the business cycle differ from the trendline?
3. Explain why some economists believe that the U.S. economy has been experiencing “micro” recessions. What are some reasons for this development?
4. Using the simple circular flow model, explain why the sum of income earned in an economy equals the sum of spending in the economy.
Answer Key
1. Macroeconomics looks at an economy as a whole rather than its individual industries and markets. It steps back and looks at the overall health of the economy. The major variables it tracks include gross domestic product, the unemployment rate, and inflation.
2. The business cycle has two main phases—contraction and expansion. Starting at the peak, economic activity contracts and the economy slides into a recession or downturn. Economic activity hits bottom at the trough and picks up as the economy goes into a recovery. The expansion continues until the economy reaches the peak. The trend is the long-term direction of an economy's growth while the business cycle focuses on the short-term ebbs and flows of economic activity.
3. Since the early 1980s, the periods of expansion have been getting longer and the recessions shorter and less severe. For example, in the 30 years prior to 1983, the economy had seven recessions lasting an average of eleven months. Since 1983 there have been two recessions lasting an average of eight months. A downside to this development is that recoveries have been getting weaker. Some reasons for the change is that businesses have used new technologies (such as computers) and management techniques (such as supply chain management) and have focused more on producing services.
4. The circular flow shows that households earn income, which is then used to purchase the goods and services firms produce. The cycle is complete when the sales revenue is used to pay labor and other resources for their productive services. Since the funds used by firms to pay income come from the funds used for the purchase of goods and services, aggregate income and expenditures are equal. A simple example would be the purchase of an automobile for $20,000. Expenditure (from the buyer's perspective) is $20,000 and income (from the seller's perspective) is $20,000.
1. An example of an indicator tracked by macroeconomists is:
A) the price of apples.
B) gross domestic product.
C) employment in the mining industry.
D) the production of laptops.
2. The Great Depression:
A) occurred in the period before World War I.
B) led economists to begin studying macroeconomic activity.
C) was caused by hyperinflation.
D) can be cured by administering Prozac to the entire population.
3. Major macroeconomic data in the early 1980s show:
A) high unemployment and high inflation.
B) high unemployment and low inflation.
C) low unemployment and high inflation.
D) low unemployment and low inflation.
4. A recession historically lasts between:
A) 6 and 16 months.
B) 2 and 4 years.
C) 1 and 11 years.
D) 2 and 3 months.
5. During a typical economic recovery:
A) inflation drops.
B) people become pessimistic.
C) unemployment drops.
D) incomes fall.
6. Which organization dates business cycles?
A) Federal Reserve
B) National Bureau of Economic Research
C) Bureau of Commerce and Labor Department
D) Bureau of Economic Analysis
20. Since 1983, the intensity of the business cycle has been reduced due to all but which of the following factors?
A) reduction in the size of the budget deficit relative to real GDP
B) better supply chain management
C) increasing shift to a service economy
D) technological improvements in computers and communications
7. In the last few decades, recessions have been becoming less pronounced. However, at the same time:
A) rising interest rates have reduced the strength of the expansions.
B) inflation has rapidly accelerated.
C) fewer jobs have been created during economic recoveries.
D) the unemployment rate has risen considerably during periods of expansion.
8. Which of the following changes is a reason for the recent change in the characteristics of business cycles?
A) innovations in supply chain management
B) shift to manufacturing in the GDP
C) increasing effectiveness of trade barriers
D) global warming
9. The event that stimulated the U.S. government's commitment to tracking the economy's health through a national income accounting system was the:
A) Civil War and Reconstruction.
B) Panic of 1907.
C) Great Depression.
D) Oil Embargo of 1973.
10. Simon Kuznets:
A) created the gross national product as a way of measuring a nation's economic output.
B) created the National Bureau of Economic Research.
C) was Secretary of Treasury during World War II.
D) created the hair net.
11. The two approaches used by government in estimating GDP are:
A) statistical and nonstatistical.
B) survey and nonsurvey.
C) income and earnings.
D) expenditure and income.
12. A sheep ranch produces $30 worth of wool. A suit manufacturer produces $60 worth of suits. A retail outlet sells a suit to a customer for $180. The GDP would be:
A) $30.
B) $180.
C) $270.
D) zero, because wool suits are worthless.
13. Which of the following items would be a durable good?
A) college education
B) horseradish
C) refrigerator
D) Mohawk hair cut
14. Economists believe that changes in investment spending are important for forecasting the business cycle because:
A) increases in investment spending raise tax revenues, which allows government to spend more.
B) investment closely reflect consumer sentiment.
C) changes in inventory show where the economy has been.
D) investment is a key determinant of economic growth.
15. What component of American GDP is usually negative in boom years?
A) consumption
B) investment
C) government spending
D) net exports
16. Which equation summarizes the expenditures approach to measuring GDP?
A) Y = C + S
B) total spending = total income
C) GDP = C + I + G + (X – M)
D) GDP = NDP + depreciation
17. Which of the following statements does NOT describe an adjustment to national income to obtain GDP?
A) Net exports are added to national income.
B) A capital consumption allowance is added to national income.
C) Income payments from the rest of the world are added to national income.
D) Payments U.S. corporations and residents send to foreign residents are subtracted from national income.
18. Net domestic product measures:
A) C + I + G + (X – M).
B) GDP minus depreciation.
C) GDP plus income payments from the rest of the world minus income payments to the rest of the world.
D) national income plus income payments from the rest of the world minus income payments to the rest of the world.
19. Which of the following two things can people do with money received as disposable personal income?
A) pay taxes or put money into savings
B) pay taxes or spend the money
C) spend the money or put money into savings
D) pay taxes or buy government bonds
20. Schumpeter's term “creative destruction” describes the:
A) Luddite's destruction of machines.
B) innovative dynamism of capitalism.
C) working class movement of communism.
D) destruction of buildings.
Answer Key
1. B
2. B
3. A
4. A
5. C
6. B
7. A
8. A
9. C
10. A
11. D
12. B
13. C
14. D
15. D
16. C
17. A
18. B
19. C
20. B
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