Issues in Economics Today 7th Edition Guell Test Bank Download

Chapter 6
Every Macroeconomic Word You Ever Heard: Gross Domestic

Product, Inflation, Unemployment, Recession and Depression
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Multiple Choice
1. The reason that only final sales are counted in GDP is

A) to avoid double counting goods that are sold so as to be resold.
B) to not count production in other countries.
C) because the government can't get records on intermediate sales.
D) to simplify the computation and no other reason.
Answer: A
2. One subject of study for macroeconomics is

A) inflation.
B) monopoly.
C) perfect competition.
D) the shape of an individual's demand curve.
Answer: A

A) unemployment.
B) monopoly.
Answer: A

A) economic growth.
B) monopoly.
Answer: A
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5. In measuring Gross Domestic Product, goods produced by foreign firms in the United States
are
A) counted, and so are goods produced by American firms in foreign countries.
B) counted, but goods produced by American firms in foreign countries are not counted.
C) not counted, but goods produced by American firms in foreign countries.
D) not counted, and goods produced by American firms in foreign countries are also not
counted.
Answer: B
6. Gross Domestic Product is counted using two methods: one which counts all the ways
people _____ money and another which counts all the ways people _____ money.
A) earn; spend
B) spend; save
C) earn; save
D) loan; borrow
Answer: A
7. How does GDP deal with a Ford produced in Mexico?

A) It is fully counted.
B) It is not counted at all.
C) It is partially counted.
D) Is counted at twice the value
Answer: B
8. How does GDP deal with a Toyota produced in Kentucky?

A) It is fully counted.
B) It is not counted at all.
C) It is partially counted.
D) Is counted at twice the value
Answer: A
9. How does GDP account for something that was produced for sale in one year and sold in the
next year
A) It is counted in the first year and anything that happens latter does not count.
B) It is counted in the second year.
C) It is counted as an addition to inventory (which is in business investment) in the year it.
was produced and the markup is counted in the year in which it is sold.
D) It is counted twice
Answer: C
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10. Suppose an apple pie sells at a grocery store is for $5. Suppose that the grocery store
purchased it from a baking company for $4. Suppose the baking company paid $2 for
ingredients, $1 for labor, and made $1 in profit. What is the GDP contribution of the pie?
A) It is $4.
B) It is $5.
C) It is $11.
D) It is $12.
Answer: B
11. Suppose a 1 pound steak sells at a grocery store is for $7. Suppose that the grocery store
purchased it from a butcher for $4. Suppose the butcher bought cattle from farmers for $2 per
sellable pound and paid their labor approximately $1 for pound of sellable beef labor, and
made $1 in profit. What is the GDP contribution of the steak?
A) It is $4.
B) It is $7.
C) It is $11.
D) It is $15.
Answer: B
12. Suppose a DVR is bought from China for $200 and sold in the US for $250. GDP will count
this
A) as nothing.
B) as a net of $50 ($250 sale minus $200 import).
C) as $200.
D) as $250.
Answer: B
13. Suppose a Boeing 777 is sold to a Chinese company for $250 million and resells it to a Hong
Kong airline for $251 million. GDP will count this as
A) as nothing.
B) as $250 million.
C) as $251 million.
D) as $451 million.
Answer: B
14. The reason that only final sales count in GDP is to

A) make it easier to do the accounting.
B) avoid double counting.
C) undervalue labor.
D) overvalue capital.
Answer: B
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15. Which of these goods will not be counted in GDP
A) the Ford manufactured in the US and sold in Canada.
B) the Ford manufactured in Mexico and sold in Mexico.
C) the Ford manufactured in the US in last year and sold in the US this year.
D) the spark plug sold by an auto parts store to go into a Ford when the original wears out.
Answer: B
16. GDP can be calculated using

A) either the ways people earn money or the ways people spend money.
B) the way people spend money (but not the way people earn money).
C) the way people earn money (but not the way people spend money).
D) the difference between the way people earn money and the way they spend it.
Answer: A
17. The expenditures approach to GDP equals

A) Employee Compensation + Profit + Net Property Income + Indirect Business Taxes +
Depreciation - Income Earned Abroad.
B) Consumption + Gross Investment + Government Purchases + Net Exports.
C) Consumption + Net Investment (Gross Investment-Depreciation) + Government
Purchases + Net Exports.
D) Employee Compensation - Profit - Net Property Income - Indirect Business Taxes-
Answer: B
18. The income approach to GDP equals

A) Employee Compensation + Profit + Net Property Income + Indirect Business Taxes +
B) Consumption + Gross Investment + Government Purchases + Net Exports.
C) Consumption + Net Investment (Gross Investment-Depreciation) + Government
Purchases + Net Exports.
D) Employee Compensation - Profit - Net Property Income - Indirect Business Taxes –
Answer: A
19. Inflation is measured using _________ in a price index.

A) the absolute increase
B) a multi-year weighted average increase
C) the percentage year-to-year increase
D) logarithm adjusted absolute increase
Answer: C
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20. If a market basket was defined in 2014 and it cost $10,000 to purchase the items in that
basket in 2014, while it cost $11,000 to purchase those identical goods in 2015, then the base
year is
A) 2013.
B) 2014.
C) 2015.
D) none of these.
Answer: B
basket in 2014, while it cost $11,000 to purchase those identical goods in 2015, then the price
index for the base year is
A) 100.
B) (10000/11000)*100=90.9.
C) (11000/10000)*100=110.
D) none of these
Answer: A
index for 2015 is
A) 100.
B) (10000/11000)*100=90.9.
C) (11000/10000)*100=110.
D) unknown given this data.
Answer: C
basket in 2014, while it cost $11,000 to purchase those identical goods in 2015, then the
inflation rate from 2013 to 2014 is
A) (100-100)/100*100%=0%.
B) (100-90.9)/100*100%=9.1%.
C) (110-100)/100*100%=10%.
Answer: D
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A) (100-100)/100*100%=0%.
B) (100-90.9)/100*100%=9.1%.
C) (110-100)/100*100%=10%.
Answer: C
index for the base year is
A) 100.
B) (10000/12000)*100=83.33.
C) (12000/10000)*100=120.
Answer: A
index for 2015 is
A) 100.
B) (10000/12000)*100=83.33.
C) (12000/10000)*100=120.
Answer: C
A) (100-100)/100*100%=0%.
B) (100-83.3)/100*100%=16.7%.
C) (120-100)/100*100%=20%.
Answer: D
A) (100-100)/100*100%=0%.
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B) (100-83.3)/100*100%=16.7%.
C) (120-100)/100*100%=20%.
D) unknown given this data
Answer: C
29. Using Table 6.1, the inflation rate for 1999 would be
A) 68.3% (168.3-100).
B) 2.7% (((168.3-163.9)/163.9)*100 %).
C) 4.4% (168.3-163.9).
D) 3.0% (174-163.9)/(2*163.9)*100%).
Answer: B
30. Using Table 6.1, from the 1982-1984 base to 2002, prices increased
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A) 80.9%.
B) 80.9 times.
C) by 80.9 dollars per week on monthly bills.
D) 180.9%.
Answer: A
A) 74.0% (174.0-100).
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B) 3.3% (((174.0-168.3)/168.3)*100 %).
C) 5.7% (174.0-168.3).
D) 3.1% (174-163.9)/(2*163.9)*100%).
Answer: B
A) 76.7% (176.7-100).
B) 1.6% (((176.7-174.0)/174.0)*100 %).
C) 2.7% (176.7-174.0).
D) 2.0% (180.9-174.0)/(2*174.0)*100%).
Answer: B
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A) 80.9% (180.9-100).
B) 2.4% (((180.9-176.7)/176.7)*100 %).
C) 4.2% (180.9-176.7).
D) 2.2% (184.3-176.7)/(2*176.7)*100%).
Answer: B
A) 84.3% (184.3-100).
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B) 1.9% (((184.3-180.9)/180.9)*100 %).
C) 4.4% (184.3-180.9).
D) 3.0% (190.3-180.9)/(2*180.9)*100%).
Answer: B
A) 90.3% (190.3-100).
B) 3.3% (((190.3-184.3)/184.3)*100 %).
C) 6.0% (190.3-184.3).
D) 2.6% (190.3-180.9)/(2*180.9)*100%).
Answer: B
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A) 84.3%.
B) 84.3 times.
D) 184.3%.
Answer: A
A) 90.3%.
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B) 90.3 times.
D) 190.3%.
Answer: A
A) 221.1%.
B) 121.1%.
D) 121.1 times.
Answer: B
39. Using Table 6.1, were there to have been deflation during this time period you would have
seen
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A) a slower rate of increase in the CPI.
B) a stationary CPI.
C) a more rapid rate of increase in the CPI.
D) a decrease in the CPI.
Answer: D
40. Suppose there are only two goods (Good A and Good B) and the average person buys 4 of
Good A in a year and 3 of Good B. If the Price of Good A is $5 and the Price of Good B is
$10, the price of the market basket
A) is 100.
B) is 20.
C) is 30.
D) is 50.
Answer: D
41. Suppose this is the base year and there are only two goods (Good A and Good B) and the
average person buys 4 of Good A in a year and 3 of Good B. If the Price of Good A is $5 and
the Price of Good B is $10, the price index
A) is 100.
B) is 20.
C) is 30.
D) is 50.
Answer: A
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Good A in a year and 3 of Good B. If, in the base year, the Price of Good A is $5 and the
Price of Good B is $10, and in the next year the Price of Good A is $6 and the Price of Good
B is $9, the price index in the second of the two years
A) is 51.
B) is 100.
C) is 101.
D) is 102.
Answer: D
B is $9, the inflation that occurred in the second year is
A) is 51%.
B) is 100%.
C) is 1%.
D) is 2%.
Answer: D
Good A in a year and 6 of Good B. If the Price of Good A is $8 and the Price of Good B is
$6, the price of the market basket
A) is 100.
B) is 64.
C) is 36.
D) is 50.
Answer: A
45. Suppose this is the base year and there are only two goods (Good A and Good B) and the
average person buys 8 of Good A in a year and 6 of Good B. If the Price of Good A is $8 and
the Price of Good B is $6, the price index
A) is 100.
B) is 64.
C) is 36.
D) is 50.
Answer: A
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B is $5, the price index in the second of the two years
A) is 10.
B) is 100.
C) is 110.
D) is 120.
Answer: C
B is $9, the inflation that occurred in the second year is
A) is 50%.
B) is 100%.
C) is 10%.
D) is 20%.
Answer: C
48. Suppose there are two good types (Type 1 and Type 2) and suppose the weights for the types
are 80% for Type 1 and 20% for Type 2. Suppose the Price Index for Type 1 is 125 and the
Price Index for Type 2 is 120. The overall price index is
A) is 116.
B) is 122.5.
C) is 124.
D) is 128.
Answer: C
A) Is 140.
B) Is 175.
C) Is 180.
D) Is 350.
Answer: C
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A) is 140.
B) is 150.
C) is 170.
D) is 300.
Answer: C
51. Suppose the price of gasoline has increased from $3 per gallon to $4 per gallon at the same
time that the overall price index increased from 200 to 300 then you know that the inflation
adjusted price of gasoline has
A) increased.
B) decreased.
C) remained constant.
Answer: B
A) increased.
B) decreased.
Answer: A
time that the overall price index increased from 200 to 266.66 then you know that the
inflation adjusted price of gasoline has
A) increased.
B) decreased.
Answer: C
A) increased.
B) decreased.
Answer: B
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A) increased.
B) decreased.
Answer: A
A) increased.
B) decreased.
Answer: C
57. In early 2005, inflation increased unexpectedly due to an increase oil prices. This helped
A) borrowers.
B) lenders.
C) people on fixed incomes.
D) workers.
Answer: A
58. Deflation occurs only when

A) some prices fall but average prices still rise.
B) all prices for all goods fall.
C) the average price level (CPI) falls.
D) the average price level increases but at a slower rate than before.
Answer: C
59. Economists consider deflation

A) to be generally healthy for the economy.
B) to be a normal part of the economy, not necessarily healthy or unhealthy.
C) dangerous, as it can lead to a depression.
D) to be no better and no worse than inflation.
Answer: C
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60. With deflation people will
A) buy goods earlier than they had originally planned.
B) feel compelled to borrow money.
C) delay their purchases of goods in hopes prices will fall further.
D) see their paycheck rise as bosses seek to reward high performers.
Answer: C
61. Economists generally believe that relative to the true cost of living, the CPI
A) is perfectly measured.
B) overstates it by a factor of 2 (meaning that inflation is really only half as bad as the
government states).
C) overstates it by a difference of about .8% (meaning that an official inflation rate of 1.8%
is really only about 1%).
D) understates it by a factor of 2 (meaning that inflation is actually twice as bad as the
government states).
Answer: C
62. The Consumer Price Index (CPI) is a heavily criticized measure of inflation because
A) the government does nothing to fix its known deficiencies.
B) it consistently understates the increase in the cost-of-living.
C) it consistently overstates the increase in the cost-of-living.
D) the government constantly makes adjustments in it without warrant.
Answer: C
63. Which of the following is not a reason that the CPI overstates the cost of living?
A) There are too frequent updates of the market basket.
B) Quality improvements are not adequately incorporated.
C) The location of typical purchases is not adequately updated.
D) The tendency to substitute to nearly equivalent goods is not adequately accounted for.
Answer: A
64. Which of the following is not a reason that the CPI overstates the cost of living?
A) There are too infrequent updates of the market basket.
B) Quality improvements are not adequately incorporated.
C) The location of typical purchases is not adequately updated.
D) Substitution into nearly-equivalent goods is assumed to be more common than it is.
Answer: D
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65. According to the Bureau of Labor Statistics, the Consumer Price Index was
A) always intended to measure increases in the cost of living and does precisely that.
B) never intended to measure increases in the cost of living and no one uses it that way.
C) never intended to measure increases in the cost of living but many use it that way.
D) only intended to measure increases in the cost of living for a small segment of society.
Answer: C
66. The majority of economists believe that the Consumer Price Index
A) overstates the increase in the cost of living.
B) understates the increase in the cost of living.
C) precisely measures the increase in the cost of living.
D) overstates the increase in the cost of living in some years and understates it in others.
Answer: A
67. A reason given why the CPI overstates the cost of living is it
A) only measures the effects of inflation on the poor.
B) makes no attempt to ascertain what average people buy.
C) makes no attempt to update the market basket.
D) makes no attempt to control for substitution to cheaper goods.
Answer: D
D) makes no attempt to control for the fact that sales often occur on holidays.
Answer: D
D) makes no attempt to control for quality improvements except in consumer goods
Answer: D
D) inadequately deals with updates in product lines for existing goods.
Answer: D
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D) updates the market basket infrequently thereby missing the steep price decline in the
early adoption period.
Answer: D
72. A reason given why the CPI overstates the cost of living is that the
A) CPI only measures the effects of inflation on the poor.
B) CPI makes no attempt to ascertain what average people buy.
C) CPI makes no attempt to update the market basket.
D) BLS audits prices in the same types of stores, rather than shift to cheaper outlets.
Answer: D
73. In the 1970s and 1980s Wal-Mart entered several markets outside of its home base of
Arkansas. As a result it brought lower prices on a variety of goods. That the Bureau of Labor
Statistics did not send its shoppers into these new stores until there was a new survey led to
the CPI
A) overstating inflation because they were missing “when people shop”.
B) understating inflation because they were missing “when people shop”.
C) overstating inflation because they were missing “where people shop”.
D) understating inflation because they were missing “where people shop”.
Answer: C
74. In the 1990s and 2000s Wal-Mart entered the grocery sector in several U.S. cities and as a
result it brought lower prices on food. That the Bureau of Labor Statistics did not send its
shoppers into these new stores in a timely fashion led to the CPI
A) overstating inflation because they were missing “when people shop”.
B) understating inflation because they were missing “when people shop”.
C) overstating inflation because they were missing “where people shop”.
D) understating inflation because they were missing “where people shop”.
Answer: C
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75. DVD writers allow people to record TV shows in a high quality format. They entered the
market in 2002 at a price of $1000. By 2003 they were under $500. By the time they had
become part of the CPI market basket they are likely to be less than $250. Economists will
argue that this type of issue
A) leads to the CPI overstating the rate of inflation.
B) leads to the CPI understating the rate of inflation.
C) is well handled the by the BLS as they determine the CPI.
D) is irrelevant to CPI calculations.
Answer: A
76. Suppose people on diets buy the bulk of the ground chicken and ground turkey sold in the
U.S. and they use either interchangeably as a substitute in recipes for ground beef. If the
price of ground turkey rises and the price of ground chicken does not the then CPI will
A) understate inflation because of the issue of substitution.
B) overstate inflation because of the issue of substitution.
C) overstating inflation because of the issue of missing “where people shop”.
D) understating inflation because of the issue of missing “where people shop”.
Answer: B
77. The magnitude of the annual overstatement of the CPI is approximately

A) one-tenth of one percentage point.
B) one-half of one percentage point.
C) one percentage point.
D) five percentage point.
Answer: C
78. One of the consequences of the overstatement of the CPI is that

A) Social Security taxes are higher than they would otherwise be.
B) personal income taxes are higher than they would otherwise be.
C) Social Security payments are lower than they would otherwise be.
D) the poverty line is lower than it would otherwise be.
Answer: A

A) Social Security taxes are lower than they would otherwise be.
B) personal income taxes are lower than they would otherwise be.
Answer: B
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A) Social Security taxes are lower than they would otherwise be.
C) Social Security payments are higher than they would otherwise be.
Answer: C

A) the poverty line is higher than it would otherwise be.
D) Social Security taxes are lower than they would otherwise be.
Answer: A
82. Over the years the consequences of the biased-measurement of the CPI
A) increase linearly.
B) decrease steadily.
C) increase exponentially.
D) decrease dramatically.
Answer: C
83. The consumer price index is computed by

A) the Bureau of Price Indexes.
B) Health and Human Services.
C) the Bureau of Labor Statistics.
D) the White House Office of Management and Budget.
Answer: C
84. The political problems associated with fixing the CPI are that
A) personal income taxes would rise.
B) benefits to the poor would rise.
C) Social Security taxes would rise.
D) Social Security benefits would rise.
Answer: A
A) personal income taxes would fall.
B) benefits to the poor would fall.
D) Social Security benefits would rise.
Answer: B
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A) personal income taxes would fall.
B) benefits to the poor would rise.
D) Social Security benefits would fall.
Answer: D
87. Estimates of the overstatement of cost of living by the CPI suggest the magnitude of the
overstatement is roughly
A) 5.0 percentage points.
B) 0.3 percentage points.
C) 1.0 percentage points.
D) 0.1 percentage points.
Answer: C
88. If the CPI were fixed then the fact that it is wrong by 0.8 percentage points means that over a
ten year period it is wrong by
A) 1.1 percentage points.
B) between 1.1 and 11 percentage points .
C) 11 percentage points.
D) more than 11 percentage points.
Answer: D
89. A CPI miscalculation that overstates its increase by 0.8 percentage points will cause
A) the price of goods to rise.
B) the price of services rise.
C) the personal exemption to rise too slowly.
D) the personal exemption to rise too quickly.
Answer: D
C) Social Security's Maximum Taxable Earnings to rise too slowly.
D) Social Security's Maximum Taxable Earnings to rise too quickly.
Answer: D
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B) the poverty line to rise too slowly.
C) the price of services rise.
D) the poverty line to rise too quickly.
Answer: D
B) standard deduction to rise too slowly.
C) the price of services rise.
D) standard deduction to rise too quickly.
Answer: D
C) tax brackets cutoffs to rise too slowly.
D) tax brackets cutoffs to rise too quickly.
Answer: D
94. Because the CPI overstates the rate of inflation, Cost of Living Adjustments for wages that
are based on it will
A) cause these wages to rise more slowly that they otherwise would.
B) cause these wages to rise more quickly that they otherwise would.
C) be correct.
D) never have to account for this to get it right.
Answer: B
95. If the inflation rate turns out to be greater than was is expected to be, the clear winners are
A) lenders.
B) borrowers.
D) businesses.
Answer: B
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96. If the inflation rate turns out to be less than was is expected to be, the clear winners are
A) lenders.
B) borrowers.
D) businesses.
Answer: A
97. If the inflation rate turns out to be greater than was is expected to be, the clear losers are
A) lenders.
B) borrowers.
C) people on incomes adjusted by a COLA.
D) businesses.
Answer: B
98. If the inflation rate turns out to be less than was is expected to be, the clear losers are
A) lenders.
B) borrowers.
C) people on incomes adjusted by a COLA.
D) businesses.
Answer: A
99. Inflation, whether or not it is expected, hurts

A) lenders.
B) borrowers.
D) businesses.
Answer: C
100. The reason that the expected inflation rate matters in determining the impact on borrowers
or lenders is that
A) interest rates depend on expected inflation, rather than actual inflation.
B) interest rates depend on actual inflation, rather than expected inflation.
C) higher interest rates mean higher payments.
D) lower interest rates mean lower payments.
Answer: A
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101. The “core rate” of inflation
A) adds in food and energy to the price index.
B) removes food and energy from the price index.
C) only includes the price of food and energy in the price index.
D) is a price index associate with the important things people buy.
Answer: B
102. The annualized monthly CPI numbers are

A) more volatile than the Core CPI.
B) less Volatile than the Core CPI.
C) different, but no more or less volatile than the Core CPI.
Answer: A
103. The Personal Consumption Expenditures Index

A) strips out the cost of food and energy.
B) also includes producer prices (like the cost of iron ore).
C) includes all goods and services people buy (not just what “average” people buy).
D) only includes food and energy.
Answer: C
104. The Core Personal Consumption Expenditures Index

A) strips out the cost of food and energy from the PCE.
B) also includes producer prices (like the cost of iron ore).
C) includes all goods and services people buy (not just what “average” people buy).
D) only includes food and energy.
Answer: A
105. The Federal Reserve is most concerned with

A) the CPI.
B) the PCE.
C) the Core PCE.
D) the PPI.
Answer: C
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B is $9, one problem with the CPI way of calculating inflation is
A) it understates the importance of Good A in the budget.
B) it understates the importance of Good B in the budget.
C) it fails to recognize that people will substitute (to some degree) Good B for Good A and
therefore overstates the degree of inflation.
D) it fails to recognize that people will substitute (to some degree) Good B for Good A and
therefore understates the degree of inflation.
Answer: C
B is $12, one problem with the CPI way of calculating inflation is
C) it fails to recognize that people will substitute (to some degree) Good A for Good B and
therefore overstates the degree of inflation.
D) it fails to recognize that people will substitute (to some degree) Good A for Good B and
therefore understates the degree of inflation.
Answer: C
Price of Good B is $10, and in the next year the Price of Goods A and B both increase by 5%
at the same stores but new business starts to sell B for $9 what is the problem with the CPI
way of calculating inflation that is apparent
C) it fails to recognize that people will start to buy Good B in the new store and therefore the
CPI overstates the degree of inflation.
D) it fails to recognize that people will start to buy Good B in the new store and therefore the
CPI understates the degree of inflation.
Answer: C
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Price of Good B is $10, and in the next year the Price of Goods A and B both increase by 5%
at the same stores but Good A is much less likely to make you sick than it had been, what is
the problem with the CPI way of calculating inflation that is apparent
C) it fails to recognize the quality increase in Good A and therefore the CPI overstates the
degree of inflation.
D) it fails to recognize the quality increase in Good A therefore the CPI understates the
degree of inflation.
Answer: C
110. One problem with using Real Gross Domestic Product as a measure of social welfare is that
A) it fails to count home production.
B) it fails to count services, a growing part of the economy.
C) it double, triple, and sometimes quadruple counts goods that are produced in stages.
D) it fails to account for imports, a growing part of the economy.
Answer: A
111. One of the reasons that Real Gross Domestic Product is not synonymous with social welfare
is
A) people substitute between goods.
B) things produced by people under 18 are not counted.
C) domestic production (cooking, laundry and such) are not counted.
D) quality has remained steady.
Answer: C
is
C) it ignores the value of leisure.
Answer: C
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is
C) it treats all spending the same (spending on military hardware is treated the same as
spending on education).
Answer: C
is
C) environmental quality is ignored.
Answer: C
is
C) the underground economy (unreported and illegal income and sales) is not counted.
Answer: C
116. In Figure 6.1, which area represents a peak?
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A) A
B) B
C) C
D) D
Answer: A
117. In Figure 6.1, which area represents a recession?
A) A
B) B
C) C
D) D
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Answer: B
118. In Figure 6.1, which area represents an expansion?
A) A
B) C
C) D
D) E
Answer: D
119. In Figure 6.1, which area represents a trough?
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A) A
B) B
C) C
D) D
Answer: C
120. In Figure 6.1, which area represents a recovery?
A) A
B) B
C) C
D) D
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Answer: D
121. The period of growth from a trough that brings Real GDP back to its previous peak is called
a
A) recession.
B) recovery.
C) expansion.
Answer: B
122. The period of growth from the level of the previous peak to a new peak in Real GDP is
called a
A) recession.
B) recovery.
C) expansion.
Answer: C
123. The period of negative growth in Real GDP is called a

A) recession.
B) recovery.
C) expansion.
Answer: A
124. If Real GDP contracted by more than 10%, economists would label that a
A) Recession.
B) Expansion.
C) Recovery.
D) Depression.
Answer: D
125. A double-dip recession occurs when

A) a recession is twice as long as a typical recession.
B) a recession results in twice the reduction in Real GDP as a typical recession.
C) shortly after coming out of a recession, the economy falls back into another one.
D) a recession results in twice the increase in unemployment as a typical recession.
Answer: C
126. Economic contractions during the period from 1950 to 2007

A) were deeper (in terms of Real GDP) than prior contractions.
B) produced larger increases in unemployment than did prior contractions.
C) were shorter than prior contractions.
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D) were more frequent than prior contractions.
Answer: C
127. Economic contractions during the period from 1950 to 2007

A) were deeper (in terms of Real GDP) than prior contractions.
B) produced larger increases in unemployment than did prior contractions.
C) were longer than prior contractions.
D) were less frequent than prior contractions.
Answer: D
128. Since the end of World War II, the rate of growth during expansions
A) has been rising.
B) has been falling.
C) is about what it was prior to World War II.
D) constant.
Answer: B
129. The period from 1984-2007 has been labeled

A) the Great Depression.
B) the Great Moderation.
C) the Great Slow Down.
D) the Great Recession.
Answer: B
130. The recession of 2007-2009 has been

A) typical of post-World War II recessions.
B) one of (if not) the worst post-World War II recession.
C) less severe than most post-World War II recessions.
Answer: B
131. A depression is different from a recession in that

A) a recession is much worse.
B) a depression is much worse.
C) a recession has inflation and a depression does not.
D) a depression has inflation and a recession does not.
Answer: B
132. As women entered the force in the 1950s through the 1990s, the
A) unemployment rate steadily rose.
B) unemployment rate steadily fell.
C) labor for participation rate steadily fell.
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D) labor for participation rate steadily rose.
Answer: D
133. As the baby boom starts to retire, you would expect to see the
A) unemployment rate steadily rise.
B) unemployment rate steadily fell.
C) labor for participation rate steadily fell.
D) labor for participation rate steadily rise.
Answer: C
134. The highest post World War II unemployment rate occurred

A) in 1974.
B) in 1982.
C) in 2001.
D) in 2009.
Answer: B
135. Which of the following can make the unemployment rate fall?
A) An increase in the number of people who are looking for work.
B) A decrease in the number of people who are looking for work.
C) An increase in the number of people with jobs.
D) A decrease in the number of people who are looking for work and an increase in the
number of people with jobs.
Answer: D
136. Which of the following can make the unemployment rate rise?
A) A decrease in the number of people who are looking for work.
B) An increase in the number of people who are looking for work.
C) A decrease in the number of people with jobs.
D) An increase in the number of people who are looking for work and an decrease in the
Answer: D
137. If the unemployment rate falls because the number of people not working but searching for
work falls, economists would attribute this to the
A) fallacy of composition.
B) encouraged worker effect.
C) discouraged worker effect.
D) none of the options are correct.
Answer: C
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138. If the unemployment rate rises because the number of people not working but searching for
work rises, economists would attribute this to the
B) encouraged worker effect.
C) discouraged worker effect.
Answer: B
139. If a person is laid-off from a job and told that they will be brought back as soon as the
economy picks up and demand for their product rises, then economists call this person
A) underemployed.
B) structurally unemployed.
C) frictionally unemployed.
D) cyclically unemployed.
Answer: D
140. If a person is unemployed because their industry has moved to another country, economists
refer to the person as
A) underemployed.
B) structurally unemployed.
C) frictionally unemployed.
Answer: B
141. A 15 year old that wants a job but can’t find one is
A) underemployed.
B) unemployed.
C) not counted at all.
Answer: C
142. In 2005, General Motors announced a 20% reduction in its staffing levels and the closure of
many assembly plants. Those laid off as a result would likely be classified as
A) seasonally unemployed.
B) frictionally unemployed.
C) cyclically unemployed.
D) structurally unemployed.
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Answer: D
143. With 125 million people working, 8 million out of work and looking for work, and 147
million neither working nor looking for work the unemployment rate would be
A) 6.4% (8/125)*100%.
B) 2.9% (8/(125+8+147)*100%.
C) 6.0% (8/(125+8)*100%.
D) 55.5% (8+147)/(125+8+147)*100%.
Answer: C
million neither working nor looking for work, the “discouraged worker effect” would be
illustrated by people in the
A) 125 million losing their jobs.
B) 8 million giving up in their search for work.
C) 147 million seeking and attaining employment.
D) 147 million seeking but not attaining employment.
Answer: B
million neither working nor looking for work, the “encouraged worker effect” would be
illustrated by people in the
B) 8 million ending their search for work.
C) 147 million seeking and attaining employment.
D) 147 million seeking but not attaining employment.
Answer: D
million neither working nor looking for work, “underemployment” would be illustrated by
C) part of the 125 million holding part time jobs when they were qualified for only part-time
jobs.
D) part of the 125 million holding part time jobs when they were qualified for full-time jobs.
Answer: D
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million neither working nor looking for work, “underemployment” would be illustrated by
C) part of the 125 million holding low-skill jobs when they were qualified for only low-skill
jobs.
D) part of the 125 million holding low-skill jobs when they were qualified for high-skill
jobs.
Answer: D
148. Which of the following can make the unemployment rate fall?
A) An increase in the number of people neither working nor looking for work.
B) A decrease in the number of people who are looking for work.
C) An increase in the number of people with jobs.
D) A decrease in the number of people who are looking for work and an increase in the
Answer: D
149. Which of the following can make the unemployment rate rise?
A) A decrease in the number of people neither working nor looking for work.
B) An increase in the number of people who are looking for work.
C) A decrease in the number of people with jobs.
D) An increase in the number of people who are looking for work and a decrease in the
Answer: D
150. If the unemployment rate falls because the number of people not working but searching for
work falls, economists would attribute this to the
B) discouraged worker effect.
C) encouraged worker effect.
D) none of the above
Answer: B
151. If the unemployment rate rises because the number of people not working but searching for
work rises, economists would attribute this to the
B) discouraged worker effect.
C) encouraged worker effect.
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Answer: C
152. To an economist a "market basket" is made up of

A) the goods average people buy and the quantities in which they buy them.
B) the goods people should buy and the quantities they should buy them in.
C) only things like cars and not services like cell phone service.
D) the goods and services people will buy next year.
Answer: A
153. A price index

A) is a mechanism to compare all prices in two different years.
B) is the ratio of the price of a market basket in one year to the price of the market basket in
the previous year times 100.
C) is the ratio of the price of a market basket in one year to the price of the market basket in
a base year times 100.
D) is a mechanism to compare all prices in two different years and the ratio of the price of a
market basket in one year to the price of the market basket in the previous year times 100.
Answer: D
154. The inflation rate is

A) the percentage increase in the price index from one year to the next.
B) the percentage increase in the price index from the base year.
C) the price index in one year minus the price index in the previous year.
D) the percentage increase in the price index from one year to the next as well as the price `
index in one year minus the price index in the previous year.
Answer: A
155. Real Gross Domestic Product is Gross Domestic Product

A) after eliminating sales of intangible things like services.
B) adjusted for inflation.
C) adjusted for changes in interest rates.
D) adjusted for the impact of pollution.
Answer: B
156. If a person is laid-off from a job and told that they will be brought back as soon as the
economy picks up and demand for their product rises, then economists call this person.
A) underemployed.
C) structurally unemployed.
Page 40
Answer: D
157. If a person is unemployed because their industry has moved to another country, economists
refer to the person as
A) underemployed.
C) structurally unemployed.
Answer: C
158. A 15 year old that wants a job but can't find one is
A) underemployed.
B) not included at all in the unemployment rate.
C) unemployed.
Answer: B
159. Of these, economists consider this the worst

A) inflation of 5%.
B) recession.
C) deflation of 5%.
D) depression.
Answer: D
160. On a graph of real gross domestic product over time, recessions appear as
A) relatively short and shallow drops on an otherwise increasing path.
B) long, sharp declines on an otherwise increasing path.
C) the dips on a path that increases and decreases equally.
D) the periods where the rate of grow, while still positive, slows.
Answer: A
161. The BLS has recently made explicit adjustments in its CPI calculations to control for
A) consumer electronics quality improvement issue.
B) food safety quality issues.
C) substitution between goods.
D) purchase location adjustments.
Answer: A
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162. The BLS has recently made explicit adjustments in its CPI calculations to control for
A) issues relating to the frequency of market basket updates.
B) food safety quality issues.
C) substitution between goods.
D) purchase location adjustments.
Answer: A
163. The device used by the BLS to adjust the market basket more frequently while still
retaining the ability to make inflation calculations is
A) chain-mail indexing.
B) envelop indexing.
C) chain-based indexing.
D) automatic indexing.
Answer: C
164. The adjustments made recently by the BLS to mitigate the overstatement of the cost-of-
living by the CPI
A) completely eliminated the problem.
B) over compensated for the problem.
C) reduced the estimated overstatement from 1.1% to .8%.
D) had no impact on the problem.
Answer: C
165. 1A price index based upon the items purchased by firms is the
A) PCE.
B) CPI.
C) core PCE.
D) Producer Price Index.
Answer: D
166. 101. A consumer price index that has had the impact of food and energy prices removed is
the
A) PCE.
B) CPI.
C) core CPI.
D) Producer Price Index.
Answer: C
Page 42
167. When estimating GDP using the income approach, aggregate income is adjusted by
A) subtracting depreciation.
B) subtracting net income earned abroad.
C) adding net income earned abroad.
D) subtracting indirect business taxes.
Answer: B
A) adding depreciation.
B) adding net income earned abroad.
C) subtracting indirect business taxes.
D) subtracting depreciation.
Answer: A
A) adding net income earned abroad.
B) subtracting depreciation.
C) subtracting indirect business taxes.
D) adding indirect business taxes.
Answer: D
170. If members of the labor force who had been classified as “unemployed” fail to find a
suitable job and stop looking for work, their decision tends to make the unemployment rate
A) decrease as the labor force decreases.
B) decrease as the labor force increases.
C) increase as the labor force decreases.
D) increase as the labor force increases.
Answer: A
171. When recent college graduates begin looking for their first professional work in June, the
unemployment rate
A) decreases as the labor force increases.
B) increases as the labor force increases.
C) decreases as the labor force decreases.
D) increases as the labor force decreases.
Answer: B
Page 43
172. Traditionally, a recession of defined by declining Real GDP over a period of at least
A) one calendar quarter.
B) one calendar year.
C) two consecutive calendar quarters.
D) two consecutive calendar years.
Answer: C
173. In the recession of 2007-2009, the National Bureau of Economic Research's Business Cycle
Dating Committee
A) applied the traditional definition of a recession, marking the beginning in late 2007.
B) applied the traditional definition of a recession, but marking the beginning only in early
2009.
C) ignored the traditional definition of a recession, claiming that no recession had in fact
occurred.
D) ignored the traditional definition of a recession, marking the beginning in late 2007.
Answer: D
174. An educated guess at what the price of some good might be, based upon its characteristics,
is called
A) an hedonic price.
B) a manufacturer's suggested retail price (MSRP).
C) an inflated price.
D) a market equilibrium price.
Answer: A
175. One major source of difficulty in measuring inflation arises because

A) prices of newly-introduced products typically are held constant after the introductory
period.
B) BLS employees can obtain only hedonic prices from retailers.
C) improvements in product quality are usually associated with increased prices.
D) the BLS currently can afford to update its market basket only once every ten years.
Answer: C
176. If GDP is $10 trillion, Personal Consumption Expenditure is $6.5 trillion, Gross Private
Investment is $2.0 trillion, and Government Consumption and Investment Expenditures
together are $2.0 trillion
A) Net Exports are $0.5 trillion.
B) Depreciation is $0.5 trillion.
C) Indirect Business Taxes are $0.5 trillion.
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D) Net Exports are -$0.5 trillion.
Answer: D
177. The GDP Deflator is different than the CPI in that

A) the GDP deflator includes everything while the CPI only includes what average people
buy.
B) the GDP deflator doesn’t include food and energy prices.
C) the CPI includes things businesses buy while the GDP deflator does not.
D) the CPI is chain-based.
Answer: A
178. The GDP Deflator is different than the CPI in that

A) the GDP deflator uses last year’s prices and the present year’s production whereas the
CPI uses present prices.
B) the GDP deflator doesn’t include food and energy prices.
C) the CPI includes things businesses buy while the GDP deflator does not.
D) the CPI is chain-based.
Answer: A
179. The data on Real GDP shows that

A) real GDP rises and falls. It has tended to rise and fall equally and has remained roughly
constant over time.
B) real GDP rises and falls. It has tended to rise for longer periods and more quickly than it
has fallen and therefore has risen through time.
C) real GDP rises and falls. It has tended to fall for longer periods and more quickly than it
has risen and therefore has fallen through time.
D) Real GDP growth is almost exactly constant
Answer: B
is
C) domestic production (cooking, laundry and such) are not counted.
Answer: C
is
C) it ignores the value of leisure.
Page 45
Answer: C
is
C) it treats all spending the same (spending on military hardware is treated the same as
spending on education).
Answer: C
is
C) environmental quality is ignored.
Answer: C
is
C) the underground economy (unreported and illegal income and sales) is not counted.
Answer: C
Page 46

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Issues in Economics Today 7th Edition Guell Test Bank Download

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Chapter 6

Every Macroeconomic Word You Ever Heard: Gross Domestic

1. The reason that only final sales are counted in GDP is

2. One subject of study for macroeconomics is

3. One subject of study for macroeconomics is

4. One subject of study for macroeconomics is

7. How does GDP deal with a Ford produced in Mexico?

8. How does GDP deal with a Toyota produced in Kentucky?

14. The reason that only final sales count in GDP is to

16. GDP can be calculated using

17. The expenditures approach to GDP equals

18. The income approach to GDP equals

19. Inflation is measured using _________ in a price index.

58. Deflation occurs only when

59. Economists consider deflation

77. The magnitude of the annual overstatement of the CPI is approximately

78. One of the consequences of the overstatement of the CPI is that

79. One of the consequences of the overstatement of the CPI is that

81. One of the consequences of the overstatement of the CPI is that

83. The consumer price index is computed by

99. Inflation, whether or not it is expected, hurts

102. The annualized monthly CPI numbers are

103. The Personal Consumption Expenditures Index

104. The Core Personal Consumption Expenditures Index

105. The Federal Reserve is most concerned with

116. In Figure 6.1, which area represents a peak?

117. In Figure 6.1, which area represents a recession?

118. In Figure 6.1, which area represents an expansion?

119. In Figure 6.1, which area represents a trough?

120. In Figure 6.1, which area represents a recovery?

123. The period of negative growth in Real GDP is called a

125. A double-dip recession occurs when

126. Economic contractions during the period from 1950 to 2007

127. Economic contractions during the period from 1950 to 2007

129. The period from 1984-2007 has been labeled

130. The recession of 2007-2009 has been

131. A depression is different from a recession in that

134. The highest post World War II unemployment rate occurred

152. To an economist a "market basket" is made up of

153. A price index

154. The inflation rate is

155. Real Gross Domestic Product is Gross Domestic Product

159. Of these, economists consider this the worst

175. One major source of difficulty in measuring inflation arises because

177. The GDP Deflator is different than the CPI in that

178. The GDP Deflator is different than the CPI in that

179. The data on Real GDP shows that

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