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Unit 1: Introduction to Macroeconomics


Short-answer Problems
1) Macroeconomics is mainly concerned with two topics. What are these two topics and how are they
related to each other?
2) Why is unemployment an economic problem? What are the non economic effects of
3) Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most
likely to be associated with a (negative) GDP gap?
4) A little bit of inflation is our friend, not our enemy. Do you agree?
5) Assume that a painter produces 20 paintings this year and 20 paintings next year. What is the
annual change in nominal GPD if the price of paintings rises from $1,000 this year to $1,500 next
year? Can you conclude that the economy grew from this year to next year based on your answer?
6) What is the difference between economic investment and financial investment? Give an example
for each type of investment.

True / False Questions

1) The business cycle is primarily concerned with changes in the level of overall prices over time.
2) Economists and policymakers are generally more concerned about nominal GDP than real GDP.
3) Real GDP per capita is found by subtracting population from real GDP.
4) Any person without a job is considered to be unemployed.
5) If the total population is 175 million, the labor force is 100 million, and 89 million workers are
employed, then the unemployment rate is 11 percent.
6) Inflation reduces the purchasing power of a person's income and savings.
7) Buying 100 shares of Google stock would be an example of economic investment.
8) A nation that wants to invest in more newly created capital in the present must be willing to forgo
present consumption.
9) The United States has had significant trade and current account surpluses in recent years.

10) Expansionary fiscal policy is so-named because it involves an expansion of the nation's money

Multi-Choice Questions
1. Macroeconomics is mostly focused on:
A. the individual markets within an economy.
B. only the largest industries in the economy.
C. the economy as a whole.
D. why businesses fail.
2. The three statistics that are the main focus for those measuring the health of the macroeconomy are:
A. real GDP, inflation, and unemployment.
B. real GDP, nominal GDP, and inflation.
C. nominal GDP, unemployment, and inflation.
D. nominal GDP, nominal GDP, and inflation.
3. Nominal gross domestic product
A. is a measure of the overall level of prices
B. measures the value of final goods and services produced within the borders of a given country during
a given time period using current prices
C. measures the value of final goods and services produced within the borders of a given country during
a given time period corrected for changing prices
D. only changes when the level of output changes
4. Real GDP refers to:
A. the value of the domestic output after adjustments have been made for environmental pollution and
changes in the distribution of income.
B. GDP data that embody changes in the price level, but not changes in physical output.
C. GDP data that reflect changes in both physical output and the price level.
D. GDP data that have been adjusted for changes in the price level.
5. Suppose a small economy produces only DVDs. In year 1, 100,000 DVDs are produce and sold at a
price of $10 each. In year 2, 100,000 DVDs are produced and sold at a price of $20 each. As a result
A. Nominal GDP does not change from year 1 to year 2
B. Real GDP increases from $1M to $2M
C. Real GDP does not change from year 1 to year 2
D. Real GDP decreases from $2M to $1M

6. If the prices of all goods and services rose, but the quantity produced remained unchanged, what
would happen to nominal and real GDP?
A. nominal and real GDP would both rise.
B. nominal and real GDP would both be unchanged.
C. real GDP would rise, but nominal GDP would be unchanged.
D. nominal GDP would rise, but real GDP would be unchanged.
7. Short-run fluctuations in output and employment are referred to as
A. business cycles
B. economic growth
C. inventory cycles
D. recessions
8. Unemployment describes the condition where:
A. equipment and machinery are going unused.
B. a person cannot get a job, but is willing to work and is actively seeking work.
C. a person does not have a job, regardless of whether or not they want one.
D. any resource sits idle.
9. Why are high rates of unemployment of concern to economists?
A. Higher rates of unemployment are linked to higher crime rates and other social problems.
B. A larger fraction of the nation's labor resource is going unutilized.
C. There is lost output that could have been produced if the unemployed had been working.
D. All of the above are reasons why economists are concerned about high unemployment
10. Inflation is defined as:
A. an increase in the overall level of prices.
B. the rate of growth in nominal GDP.
C. a situation where all prices in the economy rise simultaneously.
D. the growth phase of the business cycle.
11. Suppose a family's income increases by 5% at the same time that inflation is 6%. Then
A. the family's standard of living will increase
B. the family's standard of living will not change
C. the family's standard of living is not affected by inflation
D. the family's standard of living will fall

12. When economists refer to "investment," they are describing a situation where:
A. people are buying shares of corporate stock.
B. resources are devoted to increasing future output.
C. money is saved in a bank account.
D. financial assets are purchased in the hope of a monetary gain.
13. Which of the following is the best example of economic investment?
A. Apple builds a new plant to manufacture iPhones
B. Your college purchases a 5-year old building in order to offer more classes
C. A retiree purchases U.S. government bonds
D. Your purchase Yahoo stock
14. The current account in a nation's balance of payments includes:
A. its goods exports and imports, and its services exports and imports.
B. foreign purchases of domestic assets.
C. purchases of foreign assets.
D. all of these.
15. Fiscal policy refers to the:
A. manipulation of government spending and taxes to stabilize domestic output, employment, and the
price level.
B. manipulation of government spending and taxes to achieve greater equality in the distribution of
C. altering of the interest rate to change aggregate demand.
D. fact that equal increases in government spending and taxation will be contractionary.