Practice MCQ Chapter 5

1. Which of the following statements is false? A) A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. B) Between trough and peak, the economy is in an expansion. C) Between two peaks, the economy is in a recession. D) Expansion is the normal state of the economy

2. The inflation rate in 2007 is A) the percentage of change between the price index in 2007 and the price index in the base year. B) the percentage of change between the price index in 2007 and the price index in 2006. C) the difference between the value of price index 2007 and the value of the price index in 2006. D) the ratio of the 2007 price index and 2006 price index.

3. The peak of the business cycle A) usually occurs when the actual rate of unemployment equals the natural rate. B) is a temporary minimum level of real GDP. C) is a temporary maximum level of real GDP. D) usually occurs immediately after the recession phase.

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Use the following to answer question 4: Table 5-3 Year 2001 2002 2003 2004 2005 Price per unit $200 $400 $500 $600 $900 Output (units) 200 300 400 600 700

Table 5-3 shows price and output data for a small nation. Let 2003 be the base period. 4. Refer to Table 5-3. What is the value of the implicit price deflator for 2004? A) $1,200 B) 1.2 C) 8.33 D) 0.83

5. In the Case in Point titled Take Me Out to the Ball Game . . ., the fan price index used to track the costs of going to baseball games uses A) a fixed market basket of goods and services, like the consumer price index. B) a varying market basket of goods and services, like the consumer price index. C) a varying market basket of goods and services, like the implicit price deflator. D) a fixed market basket of goods and services, like the implicit price deflator. 6. What is a hyperinflation? A) It is an inflation rate in excess of 200 percent per year. B) It is a combination of excessive increase in the price level and rising unemployment. C) It refers to a situation where a country's money supply is no longer backed by gold.

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D) It is a situation in which financial markets collapse and the government is forced to print money. 7. Unanticipated inflation A) hurts lenders because the purchasing power of the money they collect from their borrowers is now lower. B) hurts borrowers because they must repay their debts with money that is now worth more. C) helps lenders because the purchasing power of the money they collect from their borrowers is now higher. D) helps borrowers because they must repay their debts with money that is now worth less. Use the following to answer question 8: Table 5-2 Quantity in 2007 Price 2008 Price Basket Textbooks 5 $40 $50 Gasoline 20 gallons $4 $3.80 Pizza 6 $8 $8.50 DVD rentals 4 $3.50 $3.25 Item Table 5-2 shows the market basket for a typical college student. Use this data to calculate the College Student Price Index (CSPI). 8. Refer to Table 5-2. Suppose the base year is 2008. What is the value of the price index in 2007? A) 0.88 B) 1.14 C) 3.42 D) 3.90

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Use the following to answer question 9: Table 5-7 Mechanic's hourly wage Price Index 1975 $30 1.2 2005 $84 3.2

9. Refer to Table 5-7. What has happened to a mechanic's real hourly wage between 1975 and 2005? A) It rose by 180%. B) It fell by 18%. C) It rose by 5%. D) It fell by about 64%.

10. The point on a business cycle when real GDP stops falling and begins rising is a(n) A) peak. B) trough. C) expansion. D) recession.

11. The value, at current market prices, of the final goods and services produced during a particular period is A) disposable personal product. B) gross foreign factor output. C) gross personal product. D) gross domestic product.

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12. Which of the following is not a consequence of deflation? A) Deflation causes uncertainty about the future. B) The threat of deflation can make people reluctant to borrow for long periods. C) Deflation causes the real value of money to fall. D) Firms may be reluctant to undertake investments for fear that the prices at which they can sell their output will drop. 13. The consumer price index reflects A) the changes in the prices of goods and services typically purchased by consumers. B) the average level of prices for intermediate goods and services purchased by business. C) the median price of a typical single family home. D) prices of all goods and services computed from the ratio of nominal GDP to real GDP. Use the following to answer question 14: Table 5-3 Year 2001 2002 2003 2004 2005 Price per unit $200 $400 $500 $600 $900 Output (units) 200 300 400 600 700

Table 5-3 shows price and output data for a small nation. Let 2003 be the base period. 14. Refer to Table 5-3. What is the value of 2003's output in nominal dollars? A) $100 B) $500 C) $125 D) $200,000

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15. Economic data that are adjusted for price-level changes are said to be expressed in terms of A) historical dollars. B) variable dollars. C) nominal dollars. D) real dollars.

Use the following to answer question 16: Table 5-8 Population (Civilian, noninstitutional) Civilian Labor Force Not in Labor Force Employed 520,000 364,000 156,000 338,500

16. Refer to Table 5.8. Calculate the unemployment rate. A) approximately 7% B) approximately 5.16% C) approximately 4.9% D) approximately 3%

17. Which of the following would tend to increase the natural rate of unemployment? A) an increase in the education level of the labor force B) more college graduates entering the labor force C) a higher rate of inflation D) lower unemployment benefit payments

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18. Which of the following statements best describes the substitution bias in the construction of the CPI? A) Not taking into account that consumers alter their buying habits as new products come into being and lifestyles change, for example, the rising popularity of cell phones instead of land-line phones. B) Not accounting for the fact that consumers are effectively getting more product for their money because technological changes have led to improvements in quality and lower production costs over time. C) The failure to recognize that over time consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives. D) The failure to capture the fact that consumers have made substitutions in their shopping habits: shifting from high-priced department stores to lower-priced discount stores. 19. An indexed payment is one A) whose real value changes with the rate of change in the price level. B) whose nominal value is held constant. C) whose dollar value changes with the rate of change in the price level. D) whose nominal value is equal to its value.

20. Suppose in 2007, nominal GDP in Clarendon was $12,840 billion and real GDP was $10,560 billion. Calculate the value of the implicit price deflator. Follow the convention of multiplying price indexes by 100. A) 21.59 B) 82.24 C) 121.59 D) 177.57

21. If the cost of a market basket is $150 in 2004 and $200 in 2005, the price index for 2004 using 2005 as the base year is A) 0.75. B) 1.00.

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C) 1.33. D) 1.50.

22. Welfare reforms enacted in 1996 put more pressure on welfare recipients to look for work. The new law mandated cutting off benefits after a certain length of time. Which of the following is likely to occur as a result of this provision? A) the natural rate of unemployment and the unemployment rate are likely to increase. B) the natural rate of unemployment is likely to decrease, but the unemployment rate is likely to increase. C) the natural rate of unemployment is not affected, but the unemployment rate is likely to increase. D) the natural rate of unemployment is not affected, but the unemployment rate is likely to fall. 23. A complete business cycle is defined by the passage from A) one peak to the next peak. B) one peak to the next trough. C) one trough to the ensuing expansion. D) one expansion to the next expansion.

Use the following to answer question 24: Table 5-8 Population (Civilian, noninstitutional) Civilian Labor Force Not in Labor Force Employed 520,000 364,000 156,000 338,500

24. Refer to Table 5.8. Now suppose 4,000 of the people looking for work get discouraged and give up their searches. What happens to the unemployment rate? A) 6.35%

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B) 5.97% C) 5.91% D) 2.92%

25. To measure the core inflation rate, the Bureau of Economic Analysis uses a price measure that A) excludes food and energy prices because the prices of these items can be volatile. B) includes food and energy prices because the se items account for a significant portion of the typical consumer's expenditures. C) is made up of a fixed basket that includes durable goods, nondurable goods, and services. D) includes prices for different components of gross private domestic investment, government spending, and personal consumption expenditures.

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. C B C B A A D A C B D C A C D A B C C C A A A B A

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