MULTIPLE CHOICE SECTION

1. Total spending in the economy is equal to:

(a) C+I-G+X-IM

(b) C+I+G+X-IM

(c) C+I-G-X+IM

(d) C-I+G+X-IM

2. Potential GDP is

(a)  always equal to actual nominal GDP

(b)  always equal to actual real GDP

(c)  equal to the amount of output that the economy could produce if all inputs were fully used

(d)  equal to the rate of unemployment

3. Physical investments (I) are likely to increase when

(a) disposable income increases

(b) loan rates decrease

(c) the stock market crashes

(d) loan rates increase

4. Which of the following situations is likely to determine an increase in real GDP per capita in the US?

(a) an increase in total real GDP in the economy, while the US population does not change

(b) a decrease in the US population while real GDP remains constant

(c) an increase in the US population combined with a decrease in real GDP

(d) both a and b

5. Which of the followings will be most likely to shift the consumption function upward

(a) a stock market crash

(b) a housing market crash

(c) a housing market boom

(d) an increase in disposable income

6. When various firms fail because their output is not demanded by society, workers may suffer

(a) structural unemployment

(b) frictional unemployment.

 (c) seasonal unemployment.

(d) cyclical unemployment.

7. If price rises, what happens to demand for a product?

(a) It increases.

(b) It decreases.

 ?(c) It does not change.

(d) Uncertain-economic theory has no answer to this question.

8. Why does quantity demanded decrease when price increases?

(a) People choose to reduce consumption of the item.

(b) People "drop out" of the market for the item.

(c) People find substitutes for the item.

(d) All of the above are correct.

9. China is the world's largest wheat producer. If China's domestic product grew by eleven percent in the previous year, it implies that

(a) production of wheat grew by more than eleven percent.

(b) products other than wheat grew by less than eleven percent.

 ?(c) China's overall output grew by eleven percent.

 (d) production of wheat is declining in China.

10. A recession is a period during which

(a) aggregate demand, production, and unemployment rises. (b) aggregate demand, production, and unemployment falls.

 ?(c) aggregate demand, production, and unemployment remain the same.

(d) aggregate demand and production rises while unemployment remains the same.

 ?(e) aggregate demand and production falls while unemployment rises.  

11. Which of the following is a true measure of national output?

(a) GDP at market price

(b) Nominal GDP

(c) GDP in current dollars

(d) GDP in constant dollars

12. Intermediate goods, like milk sold by a farmer to a supermarket, are

(a) included in GDP.

(b) included in GDP at market value.

(c) included if it is imported.

(d) are not included in GDP.

13. Richard loses his job at the railroad due to a downturn in general business conditions. He is experiencing

(a) structural unemployment.

(b) cyclical unemployment.

(c) seasonal unemployment.

(d) frictional unemployment.

14. Full employment implies which of the following is reduced to zero?

(a) cyclical unemployment only

(b) frictional unemployment only

(c) frictional and structural unemployment only

(d) frictional, structural, and cyclical unemployment

15. Which of the following types of unemployment is caused by economic recessions?

(a) structural unemployment

(b) cyclical unemployment

(c) frictional unemployment

(d) all of the above

16. The unemployment rate is equal to

(a) the number unemployed divided by the labor force.

(b) the number unemployed divided by the population.

(c) the number unemployed divided by the number employed. (d) the labor force divided by the population.

17. Suppose the economy experiences a sudden increase in output but a decrease in prices. Then, most likely:

a) the AS curve has shifted leftward, while AD has not moved

(b) the AD curve has shifted leftward, while the AS curve has not moved

(c) the AD curve has shifted rightward, while the AS curve has not moved

(d) the AS curve has shifted rightward, while the AD curve has not moved

18. To fight recession, the government may

(a) decrease aggregate demand, which will also lead to lower unemployment rates.

(b) increase aggregate demand, which will also lead to higher price levels.

(c) increase aggregate demand, which will also lead to lower price levels.

(d) decrease aggregate demand, which will also lead to higher unemployment rates.

19. An increase in the relative price of Mexican goods relative to that of American goods will:

(a) Raise US exports.

(b) Lower US imports.

(c) Raise US net exports.

(d) Raise Mexican imports.

(e) All of the above.

(f) a and d only.

20. Whirlpool Corporation buys steel in sheets to manufacture refrigerators. Whirlpool also buys a new factory and a metal press to mold the steel. Which purchases are included in GDP?

(a) the steel

(b) the steel, the factory, and the metal press

(c) the factory and the metal press

(d) the steel and the metal press

SHORT ANSWER SECTION

1. Obtain the value of nominal GDP and real GDP in 2007 and 2008 for this economy. ?Explain why looking just at the evolution of nominal GDP would make an analyst erroneously conclude that this economy has gone through a severe crisis/recession in 2008.

2. What are the three economic costs of high unemployment?

3. Mention the three main determinants of potential GDP

4. Use the income approach to calculate GDP in the economy of Spain where con- sumption = 5 billion euros, total wages for the entire economy are 4 billion, investment = 2 billion euros, Spanish firms make 5 billion worth of profits, the federal government spends 1 billion and the state and local governments spend 2 billion, imports are 1 billion and exports are 10 billion, interest income is 7 billion and the owners of capital get 3 billion. Show your work and write down the equation needed to calculate GDP according to the income approach.

5. You are the chair of the council of Economic Advisors for the State of PA. You propose a reduction in state income taxes as a way to help the local economy out of the recession. The governor (mostly concerned about tax revenue as all politicians) tells you that he is against your policy. His idea is that such a policy would generate growth, which is always inflationary and that this economy cannot bear any higher inflation rates. How do you react? Do you agree or disagree? Why? Explain your answer.

6. The demand for home computers has increased, yet the price has fallen. Explain this apparent paradox.

7. How is the unemployment rate calculated? Describe the three principal types of unemployment

8. What is Gross Domestic Product? What is included in this statistic? What is excluded? Give two examples of goods or services that are included in GDP and two examples of goods or services that are excluded.