Measuring Economic Performance

Practice Questions: Macro Test #1

1. As a measure of economic welfare, gross domestic product underestimates a country's production of goods and services when there is an increase in…

a. the production of military goods.

b. the production of anti-pollution devices.

c. crime prevention services.

d. household production.

e. legal services.

2. The short-run aggregate supply curve is likely to shift to the left when there is an increase in…

a. the cost of productive resources.

b. productivity.

c. the money supply.

d. the federal budget deficit.

e. imports.

3. The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium levels of…

a. real investment and the interest rate.

b. real disposable income and unemployment.

c. real national output and price level.

d. government expenditures and taxes.

e. imports and exports.

4. National income accountants can avoid double counting by…

a. including transfers in their calculations.

b. counting both intermediate and final goods.

c. only counting final goods.

d. only counting intermediate goods.

e. excluding inventories from their calculations.

5. The United States' economy is considered to be at "full employment" when

a. 10 to 20 percent of the labor force is unemployed.

b. 96-94 percent of the total population is employed.

c. 90 percent of the labor force is employed.

d. about 4 to 6 percent of the labor force is unemployed.

e. 100 percent of the labor force is employed.

6. Which of the following is correct?

a. Real and nominal incomes always move in the same direction.

b. Inflation increases the purchasing power of the dollar and necessarily reduces one's nominal income.

c. Inflation reduces the purchasing power of the dollar and necessarily reduces one's real income.

d. Inflation reduces the purchasing power of the dollar, but does not necessarily reduce one's real income.

7. The interest-rate effect suggests that:

a. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending.

b. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.

c. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

d. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

8. Other things equal, a reduction in personal and business taxes can be expected to:

a. increase aggregate demand and decrease aggregate supply.

b. increase both aggregate demand and aggregate supply.

c. decrease both aggregate demand and aggregate supply.

d. decrease aggregate demand and increase aggregate supply.

9. The presence of discouraged workers:

a. increases the size of the labor force, but does not affect the unemployment rate.

b. reduces the size of the labor force, but does not affect the unemployment rate.

c. may cause the official unemployment rate to overstate the amount of unemployment.

d. may cause the official unemployment rate to understate the amount of unemployment.

10. Professor Erenburg grows tomatoes for home consumption. This activity is:

a. excluded from GDP in order to avoid double counting.

b. excluded from GDP because an intermediate good is involved.

c. included in GDP because it reflects production.

d. productive but is excluded from GDP because no market transaction occurs.

11. Which of the following is not considered to be investment?

a. the purchase of a drill press by the Ajax Manufacturing Company

b. the purchase of 100 shares of AT&T by a retired business executive

c. construction of a suburban housing project

d. the building of a nursery school

e. the piling up of inventories on a grocer's shelf

12. The sales of which of the following types of products would be most sensitive to high interest rates?

a. food

b. clothing

c. automobiles

d. books

13. Which of the following statements best describes Nominal GDP?

a. Adding up all retail prices for goods and services produced in a given year and comparing them to dollar values of a base year.

b. Adding up all retail prices for goods and services produced in a given year and dividing that number by the country's population.

c. Adding up all retail prices for goods and services produced in a given year in current dollar value.

d. Adding up all retail prices for goods and services produced in a given year, then adding the estimated value of all volunteer work.

14. Which of the following is true if consumers buy more imported goods and fewer domestic

goods?

a. the trade balance moves toward deficit, and equilibrium income decreases

b. the trade balance moves toward deficit, and the equilibrium income increases

c. the trade balance moves toward surplus, and income is unaffected

d. the trade balance moves toward surplus, and equilibrium income increases

e. the trade balance moves toward surplus, and equilibrium income decreases

15. The United States government defines an individual as unemployed if the person…

a. does not hold a paying job

b. has been recently fired

c. works part time but needs full time work

d. is without a job but looking for work

e. wants a job but is not searching because he/she thinks none is available

16. All of the following should be included in this years GDP figure EXCEPT?

a. cost of constructing new homes

b. cost of new cars built

c. cost of all legal services provided

d. cost of used cars sold

e. no exceptions, they should all be included

17. Gross Domestic Product is a measure of…

a. the price level of goods and services sold.

b. total spending by federal local and state governments.

c. the quantity of goods and services produced by private businesses.

d. the market value of all final goods and services produced by the people of a given nation.

e. the market value of all final goods and services produced within a nation.

18. Of the four types of unemployment listed below, how would one classify a former manual

typewriter repairman?

a. structurally unemployed

b. cyclically unemployed

c. frictionally unemployed

d. seasonally unemployed

19. A supply shock leading to a large increase in the price of oil tends to cause which of the

following changes in the aggregate levels of price and output?

Price Level Output

a. Increases Increases

b. Increases No Change

c. Increases Decreases

d. No Change Decreases

e. No Change Increases

20. Suppose the consumer price index rises from 100 to 200. From this information, we can

conclude that…

a. each person’s real income has been cut in half.

b. consumer incomes are doubled.

c. the prices in an average consumer’s market basket are doubled.

d. all consumer prices are doubled.

e. all prices in the economy are doubled.

21. Which of the following will most likely occur as a result of an increase in labor productivity in

the economy?

a. an increase in output and a decrease in inflation

b. an increase in interest rates and a decrease in investment.

c. a decrease in the demand for money and an increase in government spending.

d. a decrease in exports and an increase in unemployment.

e. a leftward shift of the short run aggregate supply curve and a decrease in output.

22. Explain the difference between real and nominal GDP?

23. What is the difference between Gross Domestic Product and Gross National Product?

24. Give an example of three items that would not be counted in Gross Domestic Product.

25. What are the forces that can cause aggregate demand to shift?

26. What are the forces that can cause aggregate supply to shift?

27. Diagram the business cycle and explain what happens to prices, unemployment, interest rates,

inventories and aggregate demand in each phase.

28. Explain the relationship between excess capacity and inflation.

29. What is the difference between demand-pull and cost-push inflation?

30. Use the space below to answer the following question. What effects might each of the

following have on short run aggregate demand and aggregate supply? In each case use a

diagram to show the expected effects of on the equilibrium price level and level of real

domestic output. Assume that all other things remain constant.

a. A widespread fear of depression on the part of consumers.

b. A large purchase of wheat by Russia.

c. A cut in Federal spending for higher education.

d. The complete disintegration of OPEC, causing world oil prices to fall by one half.

31. Assume that real GDP increased by 4.5% over the past year while the unemployment rate fell to

4.0% and the inflation rate dropped to 2.3.

A. Use an aggregate demand / aggregate supply diagram to illustrate the cause of these changes to real GDP, unemployment, and inflation.

B. Explain what could have caused these changes in real GDP, unemployment, and inflation. (Describe a situation that could have caused the change illustrated on your graph.)

C. Suppose that the President and Congress pass a budget that includes a large decrease in personal income taxes and no changes in government spending.

1) Illustrate the impact of this budget on your aggregate demand / aggregate supply diagram.

2) List the component parts of aggregate demand and explain what impact, if any, the government’s budget would have on each component part.

3) Explain how the previously described changes will affect each of the following:

• Price level

• Real GDP

• The Unemployment Rate