Chapter 06 - An Introduction to Macroeconomics

QUIZ

1. Real gross domestic product:

A. is a measure of inflation.
B. will increase if there is an increase in the price level.
C. will increase if there is an increase in the level of output.
D. can change from one year to the next even if there is no change in output.

Answer: C

1. Suppose that real GDP increases by 5 percent while the population of a country increases by 7
percent. Then:

A. output per person necessarily increases.

E. output per person necessarily decreases.
F. output per person necessarily remains unchanged.
G. there is not enough information to determine what happens to output per person.

Answer: B

2. Which of the following is the best example of financial investment?

A. Ford Motor Company builds a new manufacturing plant.

H. A student pursues an MBA degree.
I. A retiree purchases Google stock.
J. A young couple purchases a new home.

Answer: C

3. In economics, the word “shocks” refers to:

A. situations where firms’ expectations are unmet.

K. any changes in the demand for goods and services.
L. any changes in the supply of goods and services.
M. a decrease in real GDP.

Answer: A

4. Higher oil prices are most likely to lead to:

A. a negative demand shock.

N. a positive demand shock.
O. a negative supply shock.
P. a positive supply shock.

Answer: C

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Chapter 06 - An Introduction to Macroeconomics

5. The business cycle depicts:

A. fluctuations in the general price level.

Q. the phases a business goes through from when it first opens to when it finally closes.
R. the evolution of technology over time.
S. short-run fluctuations in output and employment.

Answer: D

6. Which of the following statements is most accurate about advanced economies?

A. Economies experience a positive growth trend over the short run but experience significant
variability in the long run.
T. Economies experience a positive growth trend over the long run but experience significant
variability in the short run.
U. Economies experience positive and stable growth over both the long run and short run.
V. Economies experience little long-run growth in output but can experience significant growth
in the short run.

Answer: B

7. Before the period of modern economic growth:

A. only civilizations such as the Roman Empire experienced economic growth.

W. rates of population growth virtually matched rates of output growth.
X. most economies realized high rates of growth in output per person.
Y. output and population growth were stagnant.

Answer: B

8. What is the difference between financial investment and economic investment?

A. There is no difference between the two.

Z. Financial investment refers to the purchase of financial assets only; economic investment
refers to the purchase of any new or used capital goods.
AA. Economic investment is adjusted for inflation; financial investment is not.
BB.Financial investment refers to the purchase of assets for financial gain; economic investment
refers to the purchase of newly created capital goods.

Answer: D

9. If an economy wants to increase its current level of investment, it must:

A. sacrifice future consumption.

CC.print more money.
DD. offer more stocks and bonds to financial investors.
EE. sacrifice current consumption.

Answer: D

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Chapter 06 - An Introduction to Macroeconomics

10. Living standards in ancient Rome remained relatively constant for 1000 years because:

A. population increased at approximately the same rate as output, leaving output per person
unchanged
FF. average family sizes increased at the same rate as output per person
GG. constant wars reduced the size of the population at the same rate as output was falling,
leaving output per person unchanged
HH. constant wars depleted the economy's capital stock, resulting in little or no growth of total
output

Answer: A Feedback: Total output in ancient Rome increased several times over, but population
increases kept pace, leaving output per person unchanged.

11. Compared to the beginning of the Industrial Revolution, living standards around the world:

A. have approximately tripled for both rich and poor countries, leaving the relative gap between
rich and poor countries the same
II. have grown fastest in what were then the poorest countries, resulting in much less variation
between rich and poor nations
JJ. currently show considerably more variation between rich and poor countries
KK. show no marked trend regarding the gap between rich and poor countries

Answer: C Feedback: Living standards, as measured by GDP per capita, have diverged
considerably over the last 300 years because of diverging rates of economic growth between
rich and poor countries.

12. The purchase of corporate stock is considered:

A. an economic investment
LL. a financial investment
MM. dissaving
NN. the same as the purchase of new plant and equipment

Answer: B Feedback: Purchases of assets such as stocks and bonds are considered financial
investment, as opposed to economic investment which consists of the creation of new capital
goods.

13. If all prices could quickly adjust to unexpected changes in demand:

A. output would fluctuate in inverse proportion to the price changes

OO. output would remain constant and resources remain fully employed
PP. output would fluctuate in direct proportion to the price changes
QQ. output would fluctuate in inverse proportion to changes in employment

Answer: B Feedback: If all prices were flexible, firms would respond to unexpected changes in
demand by raising or lowering prices, rendering changes in output to meet consumer demand
unnecessary.

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Chapter 06 - An Introduction to Macroeconomics

14. If prices are inflexible, an unexpected reduction in demand for a firm's product would result
in:

A. rising inventories followed by cuts in production

RR.falling inventories followed by cuts in production
SS. immediate cuts in both production and desired inventory levels
TT. rising inventories followed by increased employment of resources

Answer: A Feedback: With inflexible prices, an unexpected reduction in demand will mean
falling sales and initially, a build-up of inventory. If this build-up of inventories persists, firms
will respond by cutting production and reducing employment of resources.

15. Refer to the following diagram: Suppose a factory minimizes its average costs by producing
50 metal bars per week. It can produce this output profitably at an expected price of $4 each,
corresponding to expected demand of DM. With flexible prices, which of the following is the
most likely initial consequence of a change in

A. Production will drop to 35 bars per week if demand unexpectedly falls to DL

UU. Production will rise to 65 bars per week if demand predictably rises to DH
VV. Profits will rise if demand unexpectedly rises to DH
WW. The price will rise to $6 and production will rise to 65 bars per week if demand
unexpectedly rises to DH

Answer: C Feedback: With flexible prices, an unexpected increase in demand will be met
initially by raising the price for the bars to $6 without moving production away from its cost-
minimizing output. The higher price results in higher profits.

16. Which product would most likely be characterized by "sticky" prices?

XX. Corn
YY. Oil
ZZ. Natural Gas
AAA. Magazines

Answer: D Feedback: The prices of basic commodities, such as corn, soybeans, oil, and gas tend
to respond very quickly to changes in market conditions. In contrast, the prices of final
consumer goods such as magazines, newspapers, and haircuts, tend to respond very slowly.

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Chapter 06 - An Introduction to Macroeconomics

17. The economy tends to exhibit short-run output fluctuations and long-run stability
because:

A. prices are more flexible in the short run than the long run
BBB. prices are more flexible in the long run than the short run
CCC. demand shocks are more common in the short run while supply shocks are more
common in the long run
DDD. government and central bank policies are destabilizing in the short run but
effective in the long run

Answer: B Feedback: In the very short run, prices are very sticky: unexpected changes in
demand are met by changes in output and employment. However, prices tend to be very flexible
in the long run, allowing the economy to adjust to economic shocks.

18. An unexpected drop in consumer spending would be classified as a:

A. negative demand shock

EEE. negative supply shock
FFF. positive demand shock
GGG. positive supply shock

Answer: A Feedback: Demand shocks are unexpected changes in the demand for goods and
services. A negative demand shock occurs when spending is lower than expected.

19. Refer to the following diagram: Suppose a factory minimizes its average costs by producing
50 metal bars per week. It can produce this output profitably at an expected price of $4 each,
corresponding to expected demand of DM. Production will likely fall to 35 bars per week if:

A. prices are flexible and demand unexpectedly falls to DL

HHH. prices are inflexible and demand unexpectedly falls to DL
III. prices are flexible and demand predictably falls to DL
JJJ. the price unexpectedly falls to $2

Answer: B Feedback: With inflexible prices, an unexpected drop in demand will be met
by building inventories and a consequent cut in production.

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