Macroeconomics Canadian 14th Edition

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The phase of the business cycle in which real domestic output declines is called:
A) the peak. B) a recession. C) the trough. D) an expansion.
Answer: B

2) The phase of the business cycle where real domestic output is at a minimum is called:
A) the peak. B) the trough. C) the pits. D) a recession.
Answer: B

3) Which phase of the business cycle would be most closely associated with an economic contraction?
A) trough B) peak C) expansion D) recession
Answer: D

4) A peak in the business cycle:

A) occurs when the inflation rate is its lowest.
B) is a temporary minimum point.
C) is a temporary maximum point.
D) occurs when the unemployment rate is its greatest.
Answer: C

5) A trough in the business cycle occurs when:

A) the natural rate of unemployment is at a minimum point.
B) cyclical unemployment is at a minimum point.
C) employment and output reach their lowest levels.
D) structural and frictional unemployment are at their highest levels.
Answer: C

6) In the expansion phase of a business cycle:

A) employment and output increase.
B) the inflation rate decreases, but productive capacity increases.
C) employment increases, but output decreases.
D) the inflation rate and productive capacity decrease.
Answer: A

7) A recession is a period in which:

A) nominal domestic output falls. B) real domestic output falls.
C) demand-pull inflation is present. D) cost-push inflation is present.
Answer: B

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8) The above diagram shows different phases of the:
A) cyclical variation. B) business cycle.
C) recession cycle. D) prosperity cycle.
Answer: B

9) Refer to the above diagram. The phases of the business cycle from points A to D are, respectively:
A) expansion, recession, trough, peak. B) peak, recession, trough, expansion.
C) trough, expansion, expansion, peak. D) peak, recession, expansion, trough.
Answer: B

10) Refer to the above diagram. The straight line E drawn through the wavy lines would provide an
estimate of the:
A) expansion trend. B) recession fluctuation.
C) natural rate of unemployment. D) growth trend.
Answer: D

11) According to the economists, different kinds of shocks to the economy could be responsible for the
variations in real output and employment over time. These shocks include:
A) the changes in the population.
B) the changes in the standards of living.
C) the changes in the level of total spending, productivity, irregular innovations and money
supply.
D) the changes in population, innovations and money supply.
Answer: C

12) Most economists believe that the immediate cause of cyclical changes in the levels of real output
and employment is:
A) the changes in the money supply. B) the changes in technology.
C) the changes in the level of total spending. D) the changes in productivity.
Answer: C

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13) Inwhich of the following industries or sectors of the economy is output likely to be most strongly
affected by the business cycle?
A) military goods
B) durable goods (machinery, equipment, etc.)
C) agricultural commodities (wheat, corn, etc.)
D) textile products (clothing)
Answer: B

14) During a serious recession we would expect output to fall the most in:
A) the clothing industry. B) the alcoholic beverage industry.
C) the machinery and equipment industry. D) agriculture industry.
Answer: C

15) The production of durable goods varies more than the production of nondurable goods because:
A) durables purchases are postponable.
B) durables purchases are non-postponable.
C) nondurables purchases are postponable.
D) durables purchases and nondurable purchases are both non- postponable.
Answer: A

16) In
which industry or sector of the economy is output least likely to be affected by the business
cycle?
A) automobile production B) capital goods production
C) agricultural commodities D) housing construction
Answer: C

17) In
which industry or sector of the economy is output least likely to be affected by the business
cycle?
A) service industry B) automobile industry
C) petroleum industry D) textile industry
Answer: A

18) The severe recession of 2008 - 2009 was precipitated by:

A) a combination of excessive money and financial frenzy.
B) a slowdown in productivity.
C) a combination of a decrease in the money supply and financial frenzy.
D) A combination of a decrease in money and a productivity slowdown.
Answer: A

19) To be officially unemployed a person must be in the labour force and must:
A) be waiting to be called back from a layoff. B) have just lost a job.
C) be 21 years of age or older. D) be actively seeking work.
Answer: D

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20) Thelabour force includes:
A) employed workers, but excludes persons who are officially unemployed.
B) employed workers and persons who are officially unemployed.
C) permanent employees, but excludes temporary employees.
D) full-time workers, but excludes part-time workers.
Answer: B

21) Assuming the total population is 100 million, the civilian labour force is 50 million, and 47 million
workers are employed, the unemployment rate:
A) is 6 percent. B) is 3 percent. C) is 7 percent. D) is 9 percent.
Answer: A

22) Theunemployment rate is the:

A) number of employed workers minus the number of workers who are not in the labour force.
B) ratio of unemployed to employed workers.
C) percentage of the labour force which is out of work.
D) percentage of the total population which is out of work.
Answer: C

23) Theofficial unemployment rate:

A) is the percentage of the labour force which is unemployed.
B) is the ratio of unemployed to employed workers.
C) is the percentage of the total population which is not working.
D) involves people over 15 years of age who are not currently seeking employment.
Answer: A

24) Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of
them become discouraged over their job prospects and cease to look for work. As a result of this, the
official unemployment rate would:
A) be unchanged.
B) increase in the short run but eventually decline.
C) increase.
D) decline.
Answer: D

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The following information is about a hypothetical economy:

Full-time employed = 80
Part-time employed = 25
Unemployed = 15
Discouraged workers = 5
Members of underground economy = 6
Consumer Price Index = 110

25) Refer to the above information. The unemployment rate is:

A) 12.5 percent. B) 16.7 percent. C) 18.8 percent. D) 25 percent.
Answer: A

26) Refer to the above information. If 6 members of the labour force are presently counted as part of the
unemployed when in fact they are employed, the official unemployment rate is overstated by:
A) 0 percentage points. B) 2 percentage points.
C) 6 percentage points. D) 7.5 percentage points.
Answer: D

27) Inan economy, 35 million workers are employed out of a labour force of 50 million and a total
population of 70 million. The unemployment rate is:
A) 30 percent. B) 50 percent. C) 15 percent. D) 25 percent.
Answer: A

28) The unemployment rate in an economy is 12 percent. The civilian labour force is 50 million. The
number of employed workers in the economy is:
A) 44 million. B) 42 million. C) 40 million. D) 38 million.
Answer: A

29) The total population of an economy is 175 million, the labour force is 125 million, and the number
of unemployed is 8 million. The unemployment rate for this economy is:
A) 5.8 percent. B) 6.4 percent. C) 4.6 percent. D) 7.8 percent.
Answer: B

30) A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in
institutions, or under 15 years old. There are 188 million who are employed. What is the
unemployment rate?
A) 27 percent B) 4 percent C) 9 percent D) 6 percent
Answer: D

31) A nation has a population of 300 million people. Of these, 80 million are retired, in the military, in
institutions, or under 15 years old. There are 210 million who are employed. What is the
unemployment rate?
A) 4.5 percent B) 5.2 percent C) 3.6 percent D) 3.3 percent
Answer: A

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32) The unemployment rate in an economy is 7.5 percent. The total population of the economy is 250
million and the size of the civilian labour force is 180 million. The number of employed workers in
this economy is:
A) 15.7 million. B) 166.5 million. C) 13.5 million. D) 174.6 million.
Answer: B

33) Anne Kasperson works in her own home as a full-time caretaker and homemaker. Officially, she is:
A) in the labour force. B) not in the labour force.
C) employed. D) unemployed.
Answer: B

34) Suppose there are 10 million part-time workers and 90 million full-time workers in an economy.
Five million of the part-time workers switch to full-time work. We can conclude that:
A) the size of the labour force will increase.
B) the official unemployment rate will fall.
C) the official unemployment rate will remain unchanged.
D) the official unemployment rate will rise.
Answer: C

35) Officialunemployment statistics:

A) overstate unemployment because workers who are involuntarily working part time are counted
as being employed.
B) understate unemployment because "discouraged workers" are not counted as unemployed.
C) understate unemployment because individuals receiving unemployment compensation are
counted as employed.
D) include cyclical and structural unemployment, but not frictional unemployment.
Answer: B

36) Thepresence of discouraged workers:

A) may cause the official unemployment rate to understate the amount of unemployment.
B) reduces the size of the labour force, but does not affect the unemployment rate.
C) increases the size of the labour force, but does not affect the unemployment rate.
D) may cause the official unemployment rate to overstate the amount of unemployment.
Answer: A

37) Part-timeworkers are counted as:

A) fully employed and therefore the official unemployment rate tends to understate the level of
unemployment.
B) fully employed and therefore the official unemployment rate tends to overstate the level of
unemployment.
C) unemployed and therefore the official unemployment rate tends to understate the level of
unemployment.
D) unemployed and therefore the official unemployment rate tends to overstate the level of
unemployment.
Answer: A

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38) Assume Smith is temporarily unemployed because he has voluntarily quit his job with company A
and will begin a better job next week with company B. Smith will be considered as:
A) employed. B) secularly unemployed.
C) frictionally unemployed. D) cyclically unemployed.
Answer: C

39) Acollege or university graduate using the summer following graduation to search for a job would
best be classified as:
A) a part of frictional unemployment. B) not officially a member of the labour force.
C) a part of cyclical unemployment. D) a part of structural unemployment.
Answer: A

40) Waiting for employment and "searching for employment" are both types of:
A) cyclical unemployment. B) frictional unemployment.
C) hidden unemployment. D) structural unemployment.
Answer: B

41) Kimberly voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA
degree. With degree in hand she is now searching for a position in management. Kimberly presently
is:
A) frictionally unemployed. B) cyclically unemployed.
C) not a member of the labour force. D) structurally unemployed.
Answer: A

42) The best example of a "frictionally unemployed" worker is one who:

A) is discouraged and not actively seeking work.
B) is laid off during a recessionary period in the economy.
C) reduces productivity by causing frictions in a business.
D) is in the process of voluntarily switching jobs.
Answer: D

43) Working as an elevator operator used to be a common job in the workforce four decades ago, but
today few jobs remain. The unemployment created by introduction of automatic elevators would be
considered:
A) frictional. B) wait. C) structural. D) cyclical.
Answer: C

44) A headline reads: "Steel industry suffers slump as import competition increases and unemployment
rises." This type of unemployment can best be characterized in economic terms as:
A) structural. B) frictional. C) cyclical. D) natural.
Answer: A

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45) Eckstein has lost her job in a Quebec textile plant because of import competition. She intends to
take a short course in electronics and move to B.C. where she anticipates new jobs will be available.
We can say that Eckstein is faced with:
A) secular unemployment. B) cyclical unemployment.
C) frictional unemployment. D) structural unemployment.
Answer: D

46) Kevin has lost his job in an automobile plant because of the use of robots for welding on the
assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The
type of unemployment Kevin is faced with is:
A) frictional. B) natural. C) structural. D) cyclical.
Answer: C

47) When a group of workers find that their job skills and work experience have become obsolete and
are not needed by industry, this type of unemployment is:
A) frictional. B) search. C) cyclical. D) structural.
Answer: D

48) A mismatch between the geographic location of workers and the location of job openings would
result in what type of unemployment?
A) cyclical B) wait C) frictional D) structural
Answer: D

49) Unemployment involving a mismatch of the skills of unemployed workers and the skills required
for available jobs is called:
A) compositional unemployment. B) frictional unemployment.
C) structural unemployment. D) cyclical unemployment.
Answer: C

50) Structural unemployment:

A) is the main component of cyclical unemployment.
B) is said to occur when people are waiting to be called back to previous jobs.
C) may involve a locational mismatch between unemployed workers and job openings.
D) is also known as frictional unemployment.
Answer: C

51) Unemployment that occurs when there is a decline in total spending is called:
A) natural unemployment. B) frictional unemployment.
C) structural unemployment. D) cyclical unemployment.
Answer: D

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52) Cyclical unemployment is a consequence of:
A) technological change.
B) the everyday dynamics of a free labour market.
C) the decreasing relative importance of goods and the increasing relative importance of services
in our economy.
D) a decline in aggregate spending.
Answer: D

53) The type of unemployment associated with recessions is called:

A) cyclical unemployment. B) frictional unemployment.
C) structural unemployment. D) seasonal unemployment.
Answer: A

54) Cyclical unemployment is the result of:

A) seasonal variation in the labour force. B) a decline in total spending.
C) technological change in the economy. D) expansion in the economy.
Answer: B

55) Aheadline states: "Real GDP falls again as the economy slumps." This condition is most likely to
produce what type of unemployment?
A) frictional B) structural C) cyclical D) natural
Answer: C

56) In the depth of the Great Depression, the unemployment rate in Canada was about:
A) 20 percent. B) 33 percent. C) 40 percent. D) 15 percent.
Answer: A

57) Dr.
Homer Simpson, an economics professor, decided to take a year off from teaching to run a
commercial fishing boat in P.E.I. That year, Professor Simpson would be officially counted as:
A) structurally unemployed. B) not in the labour force.
C) employed. D) frictionally unemployed.
Answer: C

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The descriptions give the responses of four individuals to Statistics Canada.

1. Mollie just graduated from university and is now looking for work. She has had three job interviews in the past month

2. George works in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects
to return to work in several months when national economic conditions improve.

3. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last
year when the federal government cut defence spending. She has been looking for similar work for a year but no compan
seems interested in her aircraft design skills.

4. Ryan lost his job last year when his company downsized and laid off middle-level managers. He tried to find another j
for a year, but was unsuccessful and quit looking for work.

58) Refer to the above information. Which individual is frictionally unemployed?

A) George B) Ryan C) Mollie D) Jeanette
Answer: C

59) Refer to the above information. Which individual is structurally unemployed?

A) 1 B) 2 C) 3 D) 4
Answer: C

60) Refer to the above information. Which individual is cyclically unemployed?

A) 1 B) 2 C) 3 D) 4
Answer: B

61) Refer to the above information. Which individual would be included in the calculation of the
full-employment unemployment rate?
A) 2 and 4 B) 1 and 3 C) 1 only D) 2 only
Answer: B

62) If the unemployment rate is 9 percent and the natural rate of unemployment is 7.5 percent, then the:
A) cyclical unemployment rate and the frictional unemployment rate together are 7.5 percent.
B) frictional unemployment rate is 7.5 percent.
C) natural rate of unemployment will eventually increase.
D) cyclical unemployment rate is 1.5 percent.
Answer: D

63) Which of the following constitute the unemployment occurring when the natural rate of
unemployment exists?
A) frictional, structural, and cyclical unemployment.
B) frictional and cyclical unemployment
C) structural, seasonal and frictional unemployment
D) cyclical and structural unemployment
Answer: C

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64) Canada'seconomy is considered to be at "full employment" when:
A) about 6-7 percent of the labour force is unemployed.
B) 100 percent of the labour force is employed.
C) 90 percent of the labour force is employed.
D) 90 percent of the total population is employed.
Answer: A

65) Thenatural rate of unemployment is:

A) that rate of unemployment occurring when the economy is at its potential output.
B) higher than the full-employment rate of unemployment.
C) lower than the full-employment rate of unemployment.
D) found by dividing total unemployment by the size of the labour force.
Answer: A

66) When the Canadian economy has achieved "full employment," the unemployment rate is at or
below:
A) 3.3 percent. B) 7 percent. C) 4.0 percent. D) 2.5 percent.
Answer: B

67) Atthe economy's natural rate of unemployment:

A) only frictional unemployment exists.
B) there is only a relatively small amount of cyclical unemployment.
C) the economy achieves its potential output.
D) none of the above are true.
Answer: C

68) Thenatural rate of unemployment:

A) may change from one decade to another.
B) is found by adding the cyclical and structural unemployment rates.
C) is fixed over time.
D) cannot be changed through public policy.
Answer: A

69) Thenatural rate of unemployment is the:

A) unemployment rate experienced at the depth of a depression.
B) unemployment rate experienced by the most-skilled workers in the economy.
C) unemployment rate experienced by the least-skilled workers in the economy.
D) full-employment unemployment rate.
Answer: D

70) TheCanadian economy is said to be producing its non-inflationary potential level of GDP when the
natural rate of unemployment is:
A) 6-7 percent. B) 7-10 percent. C) 10-15 percent. D) 2.3 percent.
Answer: A

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71) The GDP gap measures the:
A) amount by which potential GDP exceeds actual GDP.
B) amount by which actual GDP exceeds NDI.
C) amount by which nominal GDP exceeds real GDP.
D) difference between NDI and GDP.
Answer: A

72) A large negative GDP gap implies:

A) a high rate of unemployment. B) an excess of imports over exports.
C) a sharply rising price level. D) a low rate of unemployment.
Answer: A

73) The aggregate cost of unemployment can be measured by the:

A) amount by which potential GDP exceeds actual GDP.
B) excess of real GDP over nominal GDP.
C) amount by which actual GDP exceeds potential GDP.
D) excess of nominal GDP over real GDP.
Answer: A

74) When the unemployment rate is relatively high, we can conclude that:
A) actual GDP is equal to potential GDP.
B) the economy is in the expansion phase of the business cycle.
C) actual GDP is in excess of potential GDP.
D) potential GDP is in excess of actual GDP.
Answer: D

75) The relationship between the size of the GDP gap and the unemployment rate is:
A) undefined.
B) direct.
C) inverse.
D) direct during recession, but inverse during expansion.
Answer: B

76) If the actual GDP is less than potential GDP:

A) potential GDP will fall.
B) the price level will rise.
C) the actual unemployment rate will be higher than the natural unemployment rate.
D) investment spending will fall.
Answer: C

77) Full-employment output is also called:

A) zero-savings output. B) potential output.
C) equilibrium output. D) zero-unemployment output.
Answer: B

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78) Okun's law:
A) indicates the number of years it will take for a constant rate of inflation to cause the price level
to double.
B) quantifies the relationship between nominal and real incomes.
C) measures the tradeoff between the rate of inflation and the rate of unemployment.
D) shows the relationship between the unemployment rate and the size of the GDP gap.
Answer: D

79) For every 1 percent that the actual unemployment rate exceeds the natural rate, there is generated a 2
percent GDP gap. This is a statement of:
A) the rule of 70. B) Stratford's law.
C) Okun's law. D) the law of nominal incomes.
Answer: C

80) Assume the natural rate of unemployment in the Canadian economy is 7 percent and the actual rate
of unemployment is 9 percent. According to Okun's law, the GDP gap:
A) is 4 percent. B) is 10 percent. C) is 2 percent. D) is 8 percent.
Answer: A

81) Okun's law indicates that for:

A) a 2 percent GDP gap, there is a generated 2 percent increase in the actual unemployment rate.
B) every 1 percent that the actual unemployment rate exceeds the natural unemployment rate,
there is a generated 5 percent GDP gap.
C) every 1 percent that the actual unemployment rate exceeds the natural unemployment rate,
there is a generated 2 percent GDP gap.
D) a 5 percent GDP gap, there is a generated 1 percent increase in the natural unemployment rate.
Answer: C

82) If
the natural rate of unemployment is 6 percent and the actual unemployment rate is 9 percent, then
Okun's law indicates that the GDP gap is:
A) 6 percent. B) 3 percent. C) 4 percent. D) 2 percent.
Answer: A

83) Ifthe natural rate of unemployment was 7 percent, the current unemployment rate was 12 percent,
and the nominal GDP was $4,000 billion, then according to Okun's law the economy would have
sacrificed:
A) $40 billion in potential output. B) $440 billion in potential output.
C) $10 billion in potential output. D) $400 billion in potential output.
Answer: D

84) Inan economy nominal GDP is $4,000 billion. The actual unemployment rate is 8 percent and the
natural rate of unemployment is 6 percent. According to Okun's law there will be:
A) $100 billion lost in potential output. B) $80 billion lost in potential output.
C) $300 billion lost in potential output. D) $160 billion lost in potential output.
Answer: D

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The following information is for a specific year in a hypothetical economy for which Okun's law is applicable:

Potential Real GDP = $200 billion

Natural rate of unemployment = 6 percent
Actual rate of unemployment = 12 percent

85) The amount of output being forgone by the above economy is:
A) $15 billion. B) $12 billion. C) $18 billion. D) $24 billion.
Answer: D

86) Thesize of the GDP gap in percentage terms for the above economy is:
A) 18 percent. B) 9 percent. C) 15 percent. D) 12 percent.
Answer: D

87) Which of the following is not correct?

A) Teenagers experience approximately the same unemployment rates as do adults.
B) The Canadian unemployment rates of male and female workers are roughly the same.
C) lower-skilled workers are more vulnerable to unemployment than are higher-skilled workers
D) The unemployment rate for teenagers is higher than that of adults.
Answer: A

88) Theunemployment rate of:

A) white-collar workers exceeds that of blue-collar workers.
B) teenagers is much higher than that of adults.
C) women greatly exceeds that of men.
D) retired persons is more than that of women.
Answer: B

89) During theGreat Recession of 2008 - 2009 in Canada:

A) unemployment rate for teenagers was below the rate for the labour force as a whole.
B) unemployment rate for women was lower than the rate for men.
C) burden of unemployment was quite evenly distributed among males and females, and young
and old workers.
D) unemployment rate for women was considerably higher than that for men.
Answer: B

90) Therate of unemployment tends to be lower the:

A) higher are the education level and the skill of workers.
B) lower are the education level and the skill of workers.
C) slower the economy grows.
D) the younger the workers are.
Answer: A

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91) Depressionmeans idleness. And idleness means loss of skills, loss of self-respect, plummeting
morale, family disintegration, and sociopolitical unrest. This quote describes some of the:
A) consequences of the hyperinflation that accompanies a recession.
B) noneconomic costs of unemployment.
C) characteristics of structural unemployment.
D) reasons for the natural rate of unemployment.
Answer: B

92) Thenational unemployment rate in Canada:

A) reveals the significant diversity in regional unemployment.
B) is always higher than the unemployment rate in each region in Canada.
C) does not reveal the significant diversity in regional unemployment.
D) is a good indicator of unemployment rate in all regions in Canada.
Answer: C

93) Compared to the United States, Canada's recent unemployment rate has been:
A) about the same. B) lower. C) more variable. D) higher.
Answer: B

94) Inflationmeans:
A) the continual rise in the general level of prices.
B) each unit of a currency (such as Canadian dollar) buys more goods and services.
C) all prices are rising, but at different rates.
D) all prices are rising and at the same rate.
Answer: A

95) Therate of inflation can be found by subtracting:

A) this year's price index from last year's price index and dividing the difference by this year's
price index.
B) the real income from the nominal income.
C) last year's price index from this year's price index.
D) last year's price index from this year's price index and dividing the difference by last year's
price index.
Answer: D

96) Theconsumer price index (CPI):

A) measures prices of goods, but not services since services don't fit into a market basket.
B) is also known as the GDP price index.
C) is an average of the prices of all consumer goods purchased each year.
D) measures changes in the prices of a market basket of some 600 goods and services purchased
by urban consumers.
Answer: D

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 97) The consumer price index:
A) measures changes in the prices of a market basket of some 50,000 goods and services.
B) is adjusted annually for changes in consumer spending patterns.
C) uses a fixed market basket set in the base year for all subsequent years.
D) is also called the GDP price index.
Answer: C

98) If the CPI was 160 in 2008 and 40 in 2005, the cost of living was:
A) constant over the period. B) 4 times lower in 2008 than in 2005
C) 4 times higher in 2008 than in 2005. D) 25 percent higher in 2008 than in 2005.
Answer: C

99) If the consumer price index was 170 in one year and 180 in the next year, then the rate of inflation
from one year to the next was approximately:
A) 5.3 percent. B) 5.9 percent. C) 5.5 percent. D) 7.2 percent.
Answer: B

100) Suppose rate of inflation for some specific year was 10 percent. If the CPI for that year was 139.7,
the previous year's CPI must have been:
A) 127.0. B) 129.7. C) 153.7. D) 100.0.
Answer: A

101) If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:
A) deflation of 4 percent. B) deflation of 3.33 percent.
C) inflation of 4 percent. D) inflation of 3.33 percent.
Answer: B

102) Suppose that the consumer price index was 140.3 in 2012 and 144.5 in 2013. Therefore, the rate of
inflation in 2013 was about:
A) 3.0 percent. B) 13.6 percent. C) 6.7 percent. D) 1.2 percent.
Answer: A

103) The consumer price index was 247 in year 1 and 272 in year 2. The rate of inflation in year 2 was
about:
A) 8 percent. B) 12 percent. C) 10 percent. D) 6 percent.
Answer: C

104) If the price index rose from 254 in year 1 to 289 in year 2, then the rate of inflation for this economy
in year 2 would be:
A) 89 percent. B) 11.3 percent. C) 35 percent. D) 13.78 percent.
Answer: D

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105) If the consumer price index was 115 in one year and 120 in the next year, then the rate of inflation
from one year to the next was:
A) 5.3 percent. B) 4.3 percent. C) 5.1 percent. D) 6.8 percent.
Answer: B

106) If the Consumer Price index rises from 300 to 333 in a particular year, the rate of inflation in that
year is:
A) 11 percent. B) 33 percent. C) 10 percent. D) 91 percent.
Answer: A

107) As applied to the price level, the "rule of 70" indicates that the number of years required for the
price to double can be found by:
A) dividing "70" into the annual rate of inflation.
B) subtracting the annual change in nominal incomes from "70."
C) dividing the annual rate of inflation into "70."
D) multiplying the annual rate of inflation by "70."
Answer: C

108) Between 1967 and 1977 the price level approximately doubled. On the basis of this information we
can say that the average annual rate of inflation over this ten-year period was about:
A) 7 percent. B) 10 percent. C) 2 percent. D) 4 percent.
Answer: A

109) If the annual inflation rate is 5 percent a year, about how many years will it take for the price level to
double?
A) 12 years B) 14 years C) 16 years D) 10 years
Answer: B

110) The price level has doubled in 35 years. The approximate annual percentage rate of increase in the
price level over this period has been:
A) 2 percent. B) 5 percent. C) 20 percent. D) 50 percent.
Answer: A

111) Given the annual rate of inflation, the "rule of 70" allows one to:
A) calculate the number of years required for the price level to double.
B) calculate the accompanying rate of unemployment.
C) determine when the value of a real asset will approach zero.
D) determine whether the inflation is demand-pull or cost-push.
Answer: A

112) If Ernie's annual real income rises by 8 percent each year, his annual real income will double in
about:
A) 5-6 years. B) 8-9 years. C) 10-11 years. D) 19-20 years.
Answer: B

17
113) If the rate of inflation is 12 percent per year, the price level will double in about:
A) 6 years. B) 4 years. C) 10 years. D) 12 years.
Answer: A

114) Inflation rates in Canada in recent years:

A) are relatively higher than the rates in other industrial countries.
B) are double digit and comparable with the rates in Kenya and Venezuela.
C) are relatively lower than the rates in some other industrial countries.
D) are relatively the same as the rates in other industrial countries.
Answer: C

115) Demand-pull inflation:

A) occurs only when the economy has reached its absolute production capacity.
B) is also called cost-push inflation.
C) occurs when total spending exceeds the economy's ability to provide output at the existing
price level.
D) occurs when prices of resources rise, pushing up costs and the price level.
Answer: C

116) Demand-pull inflation:

A) can occur only after the economy has reached its full-employment output.
B) is self-limiting.
C) can occur before the economy has reached its full-employment output.
D) can be present even during an economic depression.
Answer: C

117) Too much spending chasing too few goods best describes:
A) the inflation premium. B) demand-pull inflation.
C) cost-push inflation. D) the GDP gap.
Answer: B

118) A statement that is often used to describe demand-pull inflation is:

A) there is no such thing as a free lunch.
B) too much spending chasing too few goods.
C) money is easily earned, but not easily saved.
D) a rising tide lifts all boats.
Answer: B

119) Inflation initiated by increases in wages or other resource prices is labelled:

A) cost-pull inflation. B) cost-push inflation.
C) demand-push inflation. D) demand-pull inflation.
Answer: B

18
120) Cost-push inflation:
A) is caused by excessive total spending.
B) is a mixed blessing because it has positive effects on real output and employment.
C) shifts the nation's production possibilities curve leftward.
D) moves the economy inward from its production possibilities curve.
Answer: D

121) Cost-push inflation could be explained by:

A) an increase in the level of consumer spending.
B) a decrease in wage rates.
C) an increase in the per-unit production cost.
D) a decline in per-unit production costs.
Answer: C

122) Cost-push inflation may be caused by:

A) a negative supply shock. B) an increase in resource availability.
C) a decrease in wage rates. D) a decline in per-unit production costs.
Answer: A

123) The complexity in recognizing the type of inflation:

A) arises because sometimes the original source of inflation is unknown.
B) arises because cost-push inflation always follows the demand-pull inflation.
C) arises because demand-pull inflation always follows the cost-push inflation.
D) arises because demand-pull inflation is self-limiting while cost-push inflation will continue as
long as there is excess spending.
Answer: A

124) Core inflation refers to the:

A) underlying decreases in the CPI after volatile durable goods prices are removed.
B) underlying increases for goods and services bought by businesses only.
C) overall inflation rate for consumers and not businesses.
D) underlying increases in the CPI after volatile food and energy prices are removed.
Answer: D

125) Real income can be determined by:

A) dividing the annual rate of inflation into the number "70."
B) inflating nominal income for inflation.
C) dividing the nominal income by the price index.
D) dividing the price level by nominal income.
Answer: C

19
126) Which of the following formulas is correct? Percentage change in:
A) real income approximates percentage change in nominal income minus percentage change in
price level.
B) nominal income approximates percentage change in price level minus percentage change in
real income.
C) price level approximates percentage change in real income minus percentage change in
nominal income.
D) real income approximates percentage change in price level minus percentage change in
nominal income.
Answer: A

127) Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price
index rises from 100 to 105. The person's real income will:
A) rise by about 25 percent. B) fall by about 20 percent.
C) fall by about 2 percent. D) rise by about 15 percent.
Answer: D

128) If the price level increases by 15 percent while nominal income increases by 8 percent, then in
percentage terms real income would:
A) fall by about 7 percent. B) fall by about 8 percent.
C) fall by about 15 percent. D) rise by about 8 percent.
Answer: A

129) If average nominal income was about $15,000 and the price level index was 118, then average real
income would be about:
A) $12,712 B) $11,146 C) $13,385 D) $14,249
Answer: A

130) If the average level of nominal income is $30,000 and the price level index is 154, the average real
income would be about:
A) $17,343 B) $19,481 C) $20,955 D) $18,521
Answer: B

131) If the average level of nominal income in a nation is $44,000 and the price level index is 175, the
average real income would be about:
A) $25,143 B) $44,000 C) $18,857 D) $77,000
Answer: A

132) In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price
level was 125 and the average nominal level of income was $32,000. What happened to real income
from Year 1 to Year 2?
A) It rose by $400. B) It rose by $2,000.
C) It rose by $600. D) It fell by $400.
Answer: C

20
133) If a person's nominal income increases by 2% while the price level increases by 6%, the person's
real income:
A) increases by about 2%. B) decreases by about 2%.
C) increases by about 4%. D) decreases by about 6%.
Answer: C

134) Suppose that a person's nominal income rises by 5 percent and the price level rises from 125 to 130.
The person's real income will:
A) rise by about 4 percent. B) remain constant.
C) rise by about 1 percent. D) fall by about 1 percent.
Answer: C

135) In 2012 Ortega's nominal income rose by 8 percent and the price level rose by 5 percent. We can
conclude that Ortega's real income:
A) rose by 3 percent. B) fell by 3 percent.
C) rose by 13 percent. D) may have either increased or decreased.
Answer: A

136) Recently a labour union argued that the standard of living of its members was falling. A critic of the
union argued that this could not possibly be true because the union had been acquiring significant
increases in the nominal incomes of its members through collective bargaining. Is the critic correct?
A) No, because real income may fall if price increases are less proportionately than the increases
in nominal income.
B) Yes, because real income may fall if price increases are less proportionately than the increases
in nominal income.
C) No, because real income may fall if price increases are more proportionately than the increase
in nominal income.
D) Yes, because when you have a large nominal income your standard of living automatically
increases.
Answer: C

137) Which of the following is correct?

A) the redistribution effects of inflation depends upon whether or not it is expected.
B) inflation will always increase the real income.
C) the redistribution effects of inflation does not depend upon expectation.
D) inflation does not affect the distribution of income.
Answer: A

21
138) Which of the following is correct?
A) Inflation reduces the purchasing power of the dollar, but does not necessarily reduce one's real
income.
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) Real and nominal incomes always move in the same direction.
Answer: A

139) Inflation is undesirable because it:

A) arbitrarily redistributes real income and wealth.
B) reduces everyone's standard of living.
C) always increases everyone's standard of living.
D) always is cumulative; that is, creeping inflation invariably causes hyperinflation.
Answer: A

140) Which of the following statements is correct? Unanticipated inflation:

A) arbitrarily "taxes" fixed-income groups.
B) benefits creditors at the expense of debtors.
C) increases the purchasing power of the dollar.
D) increases the real value of savings.
Answer: A

141) Unanticipated inflation:

A) hurts people whose income is fixed. B) helps people whose income is fixed.
C) hurts borrowers and helps lenders. D) helps savers.
Answer: A

142) Unanticipated inflation arbitrarily:

A) penalises those who receive fixed money incomes.
B) penalizes those who borrow money.
C) benefits those who save money.
D) subsidizes those who receive fixed money incomes.
Answer: A

143) Unanticipated inflation tends to penalize:

A) individuals who borrow money from financial institutions.
B) people who save money in financial institutions.
C) businesses which borrow money from financial institutions.
D) governments which have a progressive personal income tax.
Answer: B

22
144) In what circumstances would lenders most benefit?
A) when there is an anticipated decrease in inflation
B) when there is an anticipated increase in inflation
C) when there is an unanticipated decrease in inflation
D) when there is an unanticipated increase in inflation
Answer: C

145) A worker would be hurt least by inflation when the:

A) worker is protected by fixed annual increases in wages and benefits in an employment contract.
B) government increases the level of social security retirement benefits to correct for the effects of
anticipated inflation.
C) worker anticipates inflation and increases savings at the bank.
D) worker is protected by a cost-of-living adjustment clause in an employment contract.
Answer: D

146) Cost-of-living adjustment clauses (COLAs):

A) apply only to demand-pull inflation.
B) increase the gap between nominal and real income.
C) invalidate the "rule of 70."
D) tie wage increases to changes in the price level.
Answer: D

147) A lender need not be penalized by inflation if the:

A) lender correctly anticipates inflation and increases the nominal interest rate accordingly.
B) inflation is unanticipated by both borrower and lender.
C) long-term rate of inflation is less than the short-term rate of inflation.
D) short-term rate of inflation is less than the long-term rate of inflation.
Answer: A

148) If the nominal interest rate is 12 percent and the real interest rate is 8 percent, then the inflation
premium is:
A) 8 percent. B) 20 percent. C) 12 percent. D) 4 percent.
Answer: D

149) You are given the following information about the economy: (1) nominal interest = 8 percent; (2)
real rate of interest = 6 percent. The inflation premium is:
A) 14 percent. B) 8 percent. C) 6 percent. D) 2 percent.
Answer: D

150) If both the real interest rate and the nominal interest rate are 3 percent, then the:
A) nominal GDP must exceed real GDP. B) inflation premium is zero.
C) inflation premium also is 3 percent. D) real GDP must exceed the nominal GDP.
Answer: B

23
151) Suppose the nominal annual interest rate on a two year loan is 16 percent and lenders expect
inflation to be 10 percent in each of the two years. The annual real rate of interest is:
A) 4 percent. B) 6 percent. C) 16 percent. D) 12 percent.
Answer: B

152) With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest
rate of 6%. But, if the rate of inflation was anticipated to be 4%, the bank would most likely charge
the firm an annual interest rate of:
A) 10 percent. B) 4 percent. C) 2 percent. D) 6 percent.
Answer: A

153) When unanticipated deflation occurs:

A) both creditors and debtors are hurt.
B) people with fixed income benefit but creditors are hurt.
C) both debtors and creditors benefit.
D) creditors and people with fixed income benefit.
Answer: D

154) Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated
inflation occurs in the economy, then:
A) lenders are hurt, but borrowers benefit. B) both lenders and borrowers are hurt.
C) both lenders and borrowers benefit. D) borrowers are hurt, but lenders benefit.
Answer: A

155) When unanticipated inflation occurs:

A) both creditors and debtors benefit. B) debtors are hurt, but creditors benefit.
C) both creditors and debtors are hurt. D) creditors are hurt, but debtors benefit.
Answer: D

156) Which statement about inflation is correct?

A) Inflation "subsidizes" those who receive relatively fixed money income.
B) Inflation will decrease the real value of property assets and increase the real value of
fixed-value assets.
C) Families are always hurt by inflation.
D) The redistributive effects of inflation are arbitrary with respect to people and groups in society.
Answer: D

157) Inflation affects:

A) the distribution, but not the level, of income.
B) the level, but not the distribution, of income.
C) both the level and the distribution of income.
D) neither the level nor the distribution of income.
Answer: C

24
158) The sequence of events by which inflation can reduce output is:
A) as prices rise, the quantity of goods and services demanded increases, the firms therefore,
produce more output which causes the unemployment to increase.
B) as prices rise, the quantity of goods and services demanded falls, the firms therefore, produce
less output which causes the unemployment to increase.
C) as prices rise, the quantity of goods and services demanded increases, the firms therefore,
produce more output which causes the unemployment to decrease.
D) as prices rise, the quantity of goods and services demanded falls, the firms therefore, produce
less output which causes the unemployment to decrease.
Answer: B

159) To limit the loss of purchasing power from inflation:

A) people increase the amount of money they hold as cash.
B) people limit the amount of money they hold as cash.
C) people limit the amount of goods and services they buy.
D) people do not spend their money.
Answer: B

160) In defending a mild inflation rate in the economy, the proponents argue that a mild inflation is a
by-product of strong spending, and as a result:
A) high spending increases the general price level, increase in the cost of labour and this would
result in cost push inflation.
B) high spending generates high profit, less need for labour and, a great incentive for firms to cut
back production.
C) even a low inflation rate reduces the real output, employment and the profits of the firms.
D) high spending generates high profit, strong demand for labour and, a great incentive for firms
to expand their production capacity.
Answer: D

161) During a period of hyperinflation:

A) income is redistributed away from savers.
B) people tend to hold goods rather than money.
C) debtors gain because they repay their debts with dollars of diminished value.
D) all of the above happen.
Answer: D

162) During 1986-1991, Nicaragua has experienced an economic condition which can be best described
as:
A) demand-pull inflation. B) cost-push inflation.
C) unanticipated inflation. D) hyperinflation.
Answer: D

25
 163) During 1993-1994, Democratic Republic of Congo has experienced an inflation rate of more than
sixty-nine thousand percent per year. This economic condition would best be described as:
A) a cost-of-living adjustment. B) cost-push inflation.
C) hyperinflation. D) a wage-price inflationary spiral.
Answer: C

164) A cumulative wage-price spiral which produces a rapid and huge increase in the price level can be
characterized as:
A) demand-pull inflation. B) hyperinflation.
C) cost-push inflation. D) anticipated inflation.
Answer: B

165) After World War I, Germany experienced an economic condition which can be best described as:
A) cost-push inflation. B) unanticipated inflation.
C) hyperinflation. D) anticipated inflation.
Answer: C

166) One perspective on low levels of inflation is that it can:

A) have no effect on businesses. B) increase real output.
C) reduce real output. D) have no effect on real output.
Answer: C

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

167) The business cycle is so named because upswings and downswings in business activity are equal in
terms of duration and intensity.
Answer: True False

168) The production of durable goods is more stable than the production of nondurables over the
business cycle.
Answer: True False

169) Generally speaking, output and employment are more variable over the business cycle in capital
goods and consumer durable industries than they are in service and nondurable consumer goods
sector.
Answer: True False

170) If the total population is 175 million, the labour force is 100 million, and 89 million workers are
employed, then the unemployment rate is 11 percent.
Answer: True False

171) Official unemployment statistics overstate unemployment because discouraged workers who are not
actively seeking work are counted as unemployed.
Answer: True False

26
172) People who work part time, but desire to work full time, are considered to be officially unemployed.
Answer: True False

173) The natural rate of unemployment in Canada is thought to be about 6-7 percent.
Answer: True False

174) In recent years the Canadian unemployment rate has been lower than the rate in most of the
European countries.
Answer: True False

175) If the price level doubles in a 23-year period, we can conclude that the average annual rate of
inflation over that period was about 3 percent.
Answer: True False

176) An annual rate of inflation of 7 percent will double the price level in about 15 years.
Answer: True False

177) During the past ten years the average annual rate of inflation in Canada has been less than 1 percent.
Answer: True False

178) Core inflation is the underlying inflation that exists when volatile food and energy prices are
omitted.
Answer: True False

179) If the nominal interest rate is 8 percent and the real interest rate is 5 percent, then the inflation
premium is 13 percent.
Answer: True False

180) Unanticipated inflation benefits some groups in the economy.

Answer: True False

181) Unanticipated inflation benefits creditors and savers.

Answer: True False

182) Unanticipated inflation benefits debtors at the expense of creditors.

Answer: True False

183) Households and businesses must spend time and effort obtaining the information they need to
distinguish between real and nominal values such as prices, wages, and interest rates.
Answer: True False

184) Hyperinflation does not have a devastating impact on real output and employment.
Answer: True False

27
Answer Key
Testname: UNTITLED20

1) B
2) B
3) D
4) C
5) C
6) A
7) B
8) B
9) B
10) D
11) C
12) C
13) B
14) C
15) A
16) C
17) A
18) A
19) D
20) B
21) A
22) C
23) A
24) D
25) A
26) D
27) A
28) A
29) B
30) D
31) A
32) B
33) B
34) C
35) B
36) A
37) A
38) C
39) A
40) B
41) A
42) D
43) C
44) A
45) D
46) C
47) D
48) D
49) C
50) C
28
Answer Key
Testname: UNTITLED20

51) D
52) D
53) A
54) B
55) C
56) A
57) C
58) C
59) C
60) B
61) B
62) D
63) C
64) A
65) A
66) B
67) C
68) A
69) D
70) A
71) A
72) A
73) A
74) D
75) B
76) C
77) B
78) D
79) C
80) A
81) C
82) A
83) D
84) D
85) D
86) D
87) A
88) B
89) B
90) A
91) B
92) C
93) B
94) A
95) D
96) D
97) C
98) C
99) B
100) A
29
Answer Key
Testname: UNTITLED20

101) B
102) A
103) C
104) D
105) B
106) A
107) C
108) A
109) B
110) A
111) A
112) B
113) A
114) C
115) C
116) C
117) B
118) B
119) B
120) D
121) C
122) A
123) A
124) D
125) C
126) A
127) D
128) A
129) A
130) B
131) A
132) C
133) C
134) C
135) A
136) C
137) A
138) A
139) A
140) A
141) A
142) A
143) B
144) C
145) D
146) D
147) A
148) D
149) D
150) B
30
Answer Key
Testname: UNTITLED20

151) B
152) A
153) D
154) A
155) D
156) D
157) C
158) B
159) B
160) D
161) D
162) D
163) C
164) B
165) C
166) C
167) FALSE
168) FALSE
169) TRUE
170) TRUE
171) FALSE
172) FALSE
173) TRUE
174) TRUE
175) TRUE
176) FALSE
177) FALSE
178) TRUE
179) FALSE
180) TRUE
181) FALSE
182) TRUE
183) TRUE
184) FALSE

31