Midterm Practice Exam

A cut in the income-tax rate is contractionary fiscal policy: it shifts aggregate demand to the left, so the price level and real output both fall.

True or false.

• True
• False

The government sends a laid-off worker an unemployment-insurance benefit. In the national accounts, how is that payment itself treated?

Select one.

• As a transfer payment, kept out of G and out of GDP
• As government purchases, since public funds paid for it
• As consumption, since a household received the money
• As investment, since it supports the worker's future

An illustrative island economy has 30 million labor-hours a year. Making one unit of consumer goods takes 2 hours, and making one unit of capital goods takes 5 hours. How many consumer goods does the island give up for each capital good it makes?

Select one.

• 0.4 consumer goods
• 15 consumer goods
• 5 consumer goods
• 2.5 consumer goods

When the Business Cycle Dating Committee judges whether a slump counts as a recession, which considerations does it weigh? Select all that apply.

Select every option that applies.

• Whether the central bank raised interest rates that year
• How far the drop in activity goes
• How long the drop in activity lasts
• Whether real GDP fell for two straight quarters, with nothing else considered
• How broadly the drop spreads across industries

An illustrative economy's GDP is 400 dollars in its base year. In year 2, its output is worth 552 dollars at year-2 prices and 460 dollars at base-year prices. What was the percentage growth of its real output?

Select one.

• 38 percent
• 23 percent
• 15 percent
• 20 percent

In an illustrative economy (billions of dollars), this year's output is worth 960 at current prices and 800 at base-year prices. Which choice gives the GDP deflator and reads it correctly?

Select one.

• 20, the amount by which the index rose
• 120, so real output sits 20 percent above the base year
• 100, so nominal and real GDP match this year
• 120, so prices sit 20 percent above the base year

On an AD–AS diagram, the vertical long-run aggregate supply line marks potential output. The point where aggregate demand meets short-run aggregate supply lies to the right of that line. What is the economy's position?

Select one.

• At its potential output, with no gap
• In an inflationary gap, producing beyond normal, full use
• In a recessionary gap, producing less than it could
• Below potential, because the crossing lies near the price-level axis

A consumer price index and a GDP deflator are each built so that, in that index's own base year, the index takes its benchmark value.

True or false.

• True
• False

An illustrative economy has 40 million labor-hours. One unit of consumer goods needs 5 hours and one unit of capital goods needs 8 hours. Plot consumer goods x across the bottom and capital goods y up the side. Which point puts all 40 million hours into consumer goods?

Select one.

• (8, 0)
• (0, 8)
• (0, 5)
• (5, 0)

After months of decline, economic activity sinks to its lowest level, and the following month it begins to recover. Which phase of the business cycle is that turning point?

Select one.

• The expansion
• The peak
• The recession
• The trough

In an illustrative clothing chain, a cotton farm sells cotton to a mill for 4 dollars, the mill sells the fabric to a tailor for 9 dollars, and the tailor sells a finished shirt to a shopper for 20 dollars. How much does this chain add to GDP?

Select one.

• 33 dollars
• 16 dollars
• 29 dollars
• 20 dollars

An illustrative county has a labor force of 3,800 people, and 304 of them are unemployed, a rate of 8%. Then 120 of the unemployed give up searching because they believe no work is available. What happens to the measured unemployment rate?

Select one.

• It stays at 8% because the same people still lack jobs
• It falls to 5% even though nobody found work
• It falls to 5% because 120 people were hired
• It rises to 9% because fewer people are in the labor force

A small illustrative country starts with real output of 100 billion dollars and expands at a steady 2% each year. Roughly what will its real output be a decade later?

Select one.

• About 196.72 billion dollars
• About 200 billion dollars
• About 120 billion dollars
• About 121.90 billion dollars

An illustrative economy has 36 million labor-hours; each unit of consumer goods needs 4 hours and each unit of capital goods needs 6 hours. It produces 3 units of consumer goods and 2 units of capital goods. Which description of this output mix is right?

Select one.

• Unattainable, because it lies off the frontier
• Attainable but wasteful, with 24 million labor-hours idle
• Efficient, because it makes some of each good
• Attainable but wasteful, with 12 million labor-hours idle

In an illustrative economy, households spend 0.75 of each extra dollar of income they receive (the marginal propensity to consume). What is the spending multiplier?

Select one.

• 0.25
• 0.75
• 3
• 4

By the rule of 70, which steady yearly growth rate would make an amount double in about 7 years?

Select one.

• 2% a year
• 10% a year
• 7% a year
• 14% a year

Suppose an illustrative economy commands 30 million labor-hours, a unit of consumer goods takes 3 hours, and a unit of capital goods takes 4 hours. Where does the output mix of 6 consumer goods and 4 capital goods lie relative to its production possibilities frontier?

Select one.

• Inside the frontier, because it needs 18 million hours
• On the frontier, because it needs 30 million hours
• Outside the frontier, because it needs 34 million hours
• Outside the frontier, because it needs 36 million hours

The legislature cancels a planned purchase of military equipment, so government purchases fall. On the AD–AS diagram, what happens?

Select one.

• Short-run aggregate supply shifts left, so the price level rises and real output falls
• Aggregate demand shifts right, so the price level and real output both rise
• The economy slides along aggregate demand, and neither curve shifts
• Aggregate demand shifts left, so the price level and real output both fall

A student sketches the aggregate demand and aggregate supply model. What quantity belongs on the horizontal axis?

Select one.

• Units sold of one typical product
• The price level, measured by an index
• Nominal GDP, at each year's own prices
• Real GDP, output at base-year prices

An illustrative economy has aggregate demand P = 25 − Y⁄100 and short-run aggregate supply P = 5 + Y⁄100 (Y in billions of dollars of real output). Business investment surges, and aggregate demand becomes P = 27 − Y⁄100 while short-run aggregate supply is unchanged. Where is the new short-run equilibrium?

Select one.

• (1,200, 15): output rises and the price level holds steady
• (1,100, 14): output rises and the price level falls
• (900, 17): output falls and the price level rises
• (1,100, 16): output and the price level both rise

In an illustrative country, total real output rises 5% over a year while the number of residents rises 2%. Roughly how fast does output per resident rise?

Select one.

• About 7%
• About 3%
• About 5%
• About 2%

Which of these claims about national output is a value judgment, so normative, instead of a testable positive claim?

Select one.

• Policymakers should care more about fair sharing of income than about raising GDP
• Imports are subtracted when output is measured by spending
• Government purchases of goods and services are one part of GDP
• Real GDP can fall in a year when nominal GDP rises

An illustrative employee's pay rises 3% over a year in which the price level climbs 7%. Using the usual approximation, roughly how did the employee's real wage change?

Select one.

• about +10%
• about −4%
• about +4%
• about +3%

An illustrative economy has aggregate demand P = 25 − Y⁄100 and short-run aggregate supply P = 5 + Y⁄100 (Y in billions of dollars of real output), and the curves cross at a price level of 15. If the price level were 16 instead, with nothing else about buyers' plans changed, what happens on the demand side?

Select one.

• Aggregate demand shifts left, and buyers want 900
• Buyers want 1,100, a move along an unchanged demand curve
• Buyers want 900, a move along an unchanged demand curve
• Aggregate demand shifts right, and buyers want 1,100

An illustrative economy produces 1,140 billion dollars of output while its potential output is 1,200 billion dollars. What does this shortfall imply for unemployment?

Select one.

• Structural unemployment vanishes, since skills now fit the jobs available
• Unemployment drops, since workers are pushed past normal, full use
• Unemployment exceeds its frictional-plus-structural level, so cyclical unemployment is positive
• Only frictional unemployment rises, as people switch between jobs