Measuring a Nation's Income

Chapter 23
Measuring a Nation's Income

TRUE/FALSE

1. In years of economic contraction, firms throughout the economy increase their production of goods and services, employment rises, and jobs are easy to find.
ANS: F DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic expansion MSC: Definitional

2. Macroeconomic statistics include GDP, the inflation rate, the unemployment rate, retail sales, and the trade deficit.
ANS: T DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Definitional

3. Macroeconomic statistics tell us about a particular household, firm, or market.
ANS: F DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Definitional

4. Macroeconomics is the study of the economy as a whole.
ANS: T DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Definitional

5. The goal of macroeconomics is to explain the economic changes that affect many households, firms, and markets simultaneously.
ANS: T DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Definitional

6. Microeconomics and macroeconomics are closely linked.
ANS: T DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Microeconomics | Macroeconomics MSC: Definitional

7. The basic tools of supply and demand are as central to macroeconomic analysis as they are to microeconomic analysis.
ANS: T DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Demand | Supply MSC: Definitional

8. GDP is the most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being.
ANS: T DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

9. GDP can measure either the total income of everyone in the economy or the total expenditure on the economy’s output of goods and services, but GDP cannot measure both at the same time.
ANS: F DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

10. For an economy as a whole, income must exceed expenditure.
ANS: F DIF: 1 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Definitional

11. An economy’s income is the same as its expenditure because every transaction has a buyer and a seller.
ANS: T DIF: 1 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Definitional

12. GDP is the market value of all final goods and services produced by a country’s citizens in a given period of time.
ANS: F DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

13. GDP adds together many different kinds of products into a single measure of the value of economic activity by using market prices.
ANS: T DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

14. U.S. GDP includes the market value of rental housing, but not the market value of owner-occupied housing.
ANS: F DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

15. U.S. GDP excludes the production of most illegal goods.
ANS: T DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

16. U.S. GDP includes estimates of the value of items that are produced and consumed at home, such as housework and car maintenance.
ANS: F DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

17. GDP includes only the value of final goods because the value of intermediate goods is already included in the prices of the final goods.
ANS: T DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Definitional

18. Additions to inventory subtract from GDP, and when the goods in inventory are later used or sold, the reductions in inventory add to GDP.
ANS: F DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Inventory MSC: Definitional

19. While GDP includes tangible goods such as books and bug spray, it excludes intangible services such as the services provided by teachers and exterminators.
ANS: F DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

20. At a rummage sale, you buy two old books and an old rocking chair; your spending on these items is not included in current GDP.
ANS: T DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

21. When an American doctor opens a practice in Bermuda, his production there is part of U.S. GDP.
ANS: F DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

22. If the U.S. government reports that GDP in the third quarter was $12 trillion at an annual rate, then the amount of income and expenditure during quarter three was $3 trillion.
ANS: T DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

23. The government computes measures of income other than GDP because these other measures usually tell different stories about overall economic conditions.
ANS: F DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Income MSC: Interpretive

24. Expenditures by households on education are included in the consumption component of GDP.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Interpretive

25. Most goods whose purchases are included in the investment component of GDP are used to produce other goods.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Interpretive

26. New home construction is included in the consumption component of GDP.
ANS: F DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Interpretive

27. Changes in inventory are included in the investment component of GDP.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Interpretive

28. The investment component of GDP refers to financial investment in stocks and bonds.
ANS: F DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Interpretive

29. The government purchases component of GDP includes salaries paid to soldiers but not Social Security benefits paid to the elderly.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Interpretive

30. If the value of an economy’s imports exceeds the value of that economy’s exports, then net exports is a negative number.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Interpretive

31. If someone in the United States buys a surfboard produced in Australia, then that purchase is included in both the consumption component of U.S. GDP and the net exports component of U.S. GDP.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | Net exports MSC: Applicative

32. If consumption is $4000, exports are $300, government purchases are $1000, imports are $400, and investment is $800, then GDP is $5700.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

33. If exports are $500, GDP is $8000, government purchases are $1200, imports are $700, and investment is $800, then consumption is $6200.
ANS: T DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Applicative

34. If consumption is $1800, GDP is $4300, government purchases are $1000, imports are $700, and investment is $1200, then exports are $300.
ANS: F DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Exports MSC: Applicative

35. U.S. GDP was almost $14 billion in 2007.
ANS: F DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

36. In 2007, government purchases was the largest component of U.S. GDP.
ANS: F DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

37. If total spending rises from one year to the next, then the economy must be producing a larger output of goods and services.
ANS: F DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

38. An increase in nominal U.S. GDP necessarily implies that the United States is producing a larger output of goods and services.
ANS: F DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Interpretive

39. Nominal GDP uses constant base-year prices to place a value on the economy’s production of goods and services, while real GDP uses current prices to place a value on the economy’s production of goods and services.
ANS: F DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP MSC: Definitional

40. Real GDP evaluates current production using prices that are fixed at past levels and therefore shows how the economy’s overall production of goods and services changes over time.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Definitional

41. The term real GDP refers to a country’s actual GDP as opposed to its estimated GDP.
ANS: F DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Interpretive

42. Changes in real GDP reflect only changes in the amounts being produced.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Definitional

43. Real GDP is a better gauge of economic well-being than is nominal GDP.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP MSC: Definitional

44. Changes in the GDP deflator reflect only changes in the prices of goods and services.
ANS: T DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Interpretive

45. If nominal GDP is $10,000 and real GDP is $8,000, then the GDP deflator is 125.
ANS: T DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

46. If nominal GDP is $12,000 and the GDP deflator is 80, then real GDP is $15,000.
ANS: T DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

47. Economists use the term inflation to describe a situation in which the economy’s overall production level is rising.
ANS: F DIF: 1 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

48. If the GDP deflator in 2006 was 160 and the GDP deflator in 2007 was 180, then the inflation rate in 2007 was 12.5%.
ANS: T DIF: 2 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

49. If the GDP deflator in 2004 was 150 and the GDP deflator in 2005 was 120, then the inflation rate in 2005 was 25%.
ANS: F DIF: 2 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

50. The GDP deflator can be used to take inflation out of nominal GDP.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Definitional

51. In 2004, the level of U.S. real GDP was close to four times its 1965 level.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Definitional

52. The output of goods and services produced in the United States has grown on average 3.2 percent per year.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: Productivity and growth TOP: Growth
MSC: Definitional

53. Periods during which real GDP rises are called recessions.
ANS: F DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Recessions MSC: Definitional

54. Recessions are associated with lower incomes, rising unemployment, and falling profits.
ANS: T DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Recessions MSC: Definitional

55. If real GDP is higher in one country than in another, then we can be sure that the standard of living is higher in the country with the higher real GDP.
ANS: F DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Standard of living MSC: Interpretive

56. Real GDP per person tells us the income and expenditure of the average person in the economy.
ANS: T DIF: 1 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP per person MSC: Definitional

57. GDP does not directly measure those things that make life worthwhile, but it does measure our ability to obtain many of the inputs into a worthwhile life.
ANS: T DIF: 1 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

58. GDP does not make adjustments for leisure time, environmental quality, or volunteer work.
ANS: T DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

59. Other things equal, in countries with higher levels of real GDP per person, life expectancy and literacy rates are higher than in countries with lower levels of real GDP per person.
ANS: T DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

SHORT ANSWER

1. GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.
ANS:
GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society's definition, they are bads, not goods.

DIF: 2 REF: 23-2 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: GDP
MSC: Interpretive

2. Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.
ANS:
Intermediate goods produced and sold during the year are not included separately as part of GDP because the value of those goods is included in the value of the final goods produced from them. If the intermediate good is produced but not sold during the year, its value is included as inventory investment for the year in which it was produced. If inventory investment was not included as part of GDP, true production would be underestimated for the year the intermediate good went into inventory, and overestimated for the year the intermediate good is used or sold.

DIF: 2 REF: 23-2 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: GDP | Intermediate goods
MSC: Interpretive

3. Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP?
ANS:
The purchase of foreign equipment is counted as investment, but GDP measures only the value of production within the geographic borders of the United States. In order to avoid including the value of the imported equipment, imports are subtracted from GDP. Hence, the value of the equipment in investment is canceled by subtracting its value as an import.

DIF: 2 REF: 23-3 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: GDP | Investment | Imports
MSC: Applicative

4. Identify the immediate effect of each of the following events on U.S. GDP and its components.
|a. |James receives a Social Security check. |
|b. |John buys an Italian sports car. |
|c. |Henry buys domestically produced tools for his construction company. |

ANS:
|a. |Since this is a transfer payment, there is no change to GDP or to any of its components. |
|b. |Consumption and imports will rise and cancel each other out so that there is no change in U.S. GDP. |
|c. |This increases the investment component of GDP and so increases GDP. |

DIF: 2 REF: 23-3 NAT: Analytic
LOC: The study of economics and definitions of economics
TOP: GDP | Transfer payments | Net exports | Investment MSC: Applicative

5. Between 1929 and 1933, NNP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price index fell from 100 to 75.
|a. |What was the percentage decline in nominal NNP from 1929 to1933? |
|b. |What was the percentage decline in real NNP from 1929 to 1933? Show your work. |

ANS:
|a. |NNP measured in current prices is nominal NNP. Nominal NNP fell from $96 billion to $48 billion, a decline of 50 percent. |
|b. |Real NNP is nominal NNP divided by the price index and multiplied by 100. Real NNP in 1929 was ($96 b/100) [pic] 100 = $96 |
| |b. Real NNP in 1933 was ($48 b/75) [pic] 100 = $64 b. Real NNP fell from $96 billion to $64 billion, a decline of 33 |
| |percent. |

DIF: 2 REF: 23-4 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: Nominal NNP | Real NNP
MSC: Applicative

6. You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully.
ANS:
Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased.

DIF: 2 REF: 23-4 NAT: Analytic
LOC: The study of economics and definitions of economics
TOP: Nominal income | Real income MSC: Interpretive

7. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents?
ANS:
Since this is in real terms, it tells us that the U.S. is able to make a lot more stuff than in the past. Some of the increase in real GDP is probably due to an increase in population, so we could say more if we knew what had happened to real GDP per person. Supposing that there was also an increase in real GDP per person, we can say that the standard of living has risen. Material things are an important part of well-being. Having sufficient amounts of things such as food, shelter, and clothing are fundamental to well-being. Other things such as security, a safe environment, access to safe water, access to medical care, justice, and freedom also matter. However, many of these things are more easily obtained by being able to produce more using fewer resources. Countries with higher real GDP per person tend to have longer life spans, less discrimination towards women, less child labor, and a higher rate of literacy.

DIF: 2 REF: 23-5 NAT: Analytic
LOC: The study of economics and definitions of economics
TOP: Real GDP | Economic welfare MSC: Interpretive

Sec00 - Measuring a Nation's Income

MULTIPLE CHOICE

1. Statistics that are of particular interest to macroeconomists
|a. |are largely ignored by the media. |
|b. |are widely reported by the media. |
|c. |include the equilibrium prices of individual goods and services. |
|d. |tell us about a particular household, firm, or market. |

ANS: B DIF: 2 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Interpretive

2. Macroeconomists study
|a. |the decisions of households and firms. |
|b. |the interaction between households and firms. |
|c. |economy-wide phenomena. |
|d. |regulations on firms and unions. |

ANS: C DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Definitional

3. Which of the following newspaper headlines is more closely related to what microeconomists study than to what macroeconomists study?
|a. |Unemployment rate rises from 5 percent to 5.5 percent. |
|b. |Real GDP grows by 3.1 percent in the third quarter. |
|c. |Retail sales at stores show large gains. |
|d. |The price of oranges rises after an early frost. |

ANS: D DIF: 2 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Microeconomics | Macroeconomics MSC: Interpretive

4. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?
|a. |Why do prices in general rise by more in some countries than in others? |
|b. |Why do wages differ across industries? |
|c. |Why do production and income increase in some periods and not in others? |
|d. |How rapidly is GDP currently increasing? |

ANS: B DIF: 2 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Microeconomics | Macroeconomics MSC: Interpretive

5. Which of the following topics are more likely to be studied by a macroeconomist than by a microeconomist?
|a. |the effect of taxes on the prices of airline tickets, the profitability of automobile-manufacturing firms, and |
| |employment trends in the food-service industry |
|b. |the price of beef, wage differences between genders, and antitrust laws |
|c. |how consumers maximize utility, and how prices are established in markets for agricultural products |
|d. |the percentage of the labor force that is out of work, and differences in average income from country to country |

ANS: D DIF: 2 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Microeconomics | Macroeconomics MSC: Interpretive

6. We would expect a macroeconomist, as opposed to a microeconomist, to be particularly interested in
|a. |explaining how economic changes affect prices of particular goods. |
|b. |devising policies to deal with market failures such as externalities and market power. |
|c. |devising policies to promote low inflation. |
|d. |identifying those markets that are competitive and those that are not competitive. |

ANS: C DIF: 2 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Microeconomics | Macroeconomics MSC: Interpretive

7. Which of the following is not a question that macroeconomists address?
|a. |Why is average income high in some countries while it is low in others? |
|b. |Why does the price of oil rise when war erupts in the Middle East? |
|c. |Why do production and employment expand in some years and contract in others? |
|d. |Why do prices rise rapidly in some periods of time while they are more stable in other periods? |

ANS: B DIF: 2 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Macroeconomics MSC: Interpretive

8. The basic tools of supply and demand are
|a. |useful only in the analysis of economic behavior in individual markets. |
|b. |useful in analyzing the overall economy, but not in analyzing individual markets. |
|c. |central to microeconomic analysis, but seldom used in macroeconomic analysis. |
|d. |central to macroeconomic analysis as well as to microeconomic analysis. |

ANS: D DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Demand | Supply MSC: Definitional

9. Which of the following statistic is usually regarded as the best single measure of a society’s economic well-being?
|a. |the unemployment rate |
|b. |the inflation rate |
|c. |gross domestic product |
|d. |the trade deficit |

ANS: C DIF: 1 REF: 23-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

Sec01 - Measuring a Nation's Income - The Economy's Income and Expenditure

MULTIPLE CHOICE

1. Which of the following statements about GDP is correct?
|a. |GDP measures two things at once: the total income of everyone in the economy and the unemployment rate of the economy’s |
| |labor force. |
|b. |Money continuously flows from households to government and then back to households, and GDP measures this flow of money.|
|c. |GDP is to a nation’s economy as household income is to a household. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

2. Gross domestic product measures two things at once:
|a. |the total spending of everyone in the economy and the total saving of everyone in the economy. |
|b. |the total income of everyone in the economy and the total expenditure on the economy's output of goods and services. |
|c. |the value of the economy's output of goods and services for domestic citizens and the value of the economy's output of |
| |goods and services for the rest of the world. |
|d. |the total income of households in the economy and the total profit of firms in the economy. |

ANS: B DIF: 1 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

3. For an economy as a whole,
|a. |wages must equal profit. |
|b. |consumption must equal saving. |
|c. |income must equal expenditure. |
|d. |the number of buyers must equal the number of sellers. |

ANS: C DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Interpretive

4. For an economy as a whole, income must equal expenditure because
|a. |the number of firms is equal to the number of households in an economy. |
|b. |international law requires that income equal expenditure. |
|c. |every dollar of spending by some buyer is a dollar of income for some seller. |
|d. |every dollar of saving by some consumer is a dollar of spending by some other consumer. |

ANS: C DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Interpretive

5. If an economy’s GDP rises, then it must be the case that the economy’s
|a. |income rises and saving falls. |
|b. |income and saving both rise. |
|c. |income rises and expenditure falls. |
|d. |income and expenditure both rise. |

ANS: D DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Interpretive

6. If an economy’s GDP falls, then it must be the case that the economy’s
|a. |income falls and saving rises. |
|b. |income and saving both fall. |
|c. |income falls and expenditure rises. |
|d. |income and expenditure both fall. |

ANS: D DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Interpretive

7. Because every transaction has a buyer and a seller,
|a. |GDP is more closely associated with an economy’s income than it is with an economy’s expenditure. |
|b. |every transaction contributes equally to an economy’s income and to its expenditure. |
|c. |the number of firms must be equal to the number of households in a simple circular-flow diagram. |
|d. |firms’ profits are necessarily zero in a simple circular-flow diagram. |

ANS: B DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Expenditure MSC: Interpretive

8. Which of the following statements about GDP is correct?
|a. |GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy’s |
| |output of goods and services. |
|b. |Money continuously flows from households to firms and then back to households, and GDP measures this flow of money. |
|c. |GDP is generally regarded as the best single measure of a society’s economic well-being. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

9. In a simple circular-flow diagram, total income and total expenditure are
|a. |never equal because total income always exceeds total expenditure. |
|b. |seldom equal because of the ongoing changes in an economy’s unemployment rate. |
|c. |equal only when one dollar is spent on goods for every dollar that is spent on services. |
|d. |always equal because every transaction has a buyer and a seller. |

ANS: D DIF: 2 REF: 23-1
NAT: Analytic LOC: Understanding and applying economic models
TOP: Circular-flow diagram MSC: Interpretive

10. In a simple circular-flow diagram,
|a. |households spend all of their income. |
|b. |all goods and services are bought by households. |
|c. |expenditures flow through the markets for goods and services, while income flows through the markets for the factors of |
| |production. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-1
NAT: Analytic LOC: Understanding and applying economic models
TOP: Circular-flow diagram MSC: Interpretive

11. In a simple circular-flow diagram, firms use the money they get from a sale to
|a. |pay wages to workers. |
|b. |pay rent to landlords. |
|c. |pay profit to the firms’ owners. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 23-1
NAT: Analytic LOC: Understanding and applying economic models
TOP: Circular-flow diagram MSC: Definitional

12. In the actual economy, households
|a. |spend all of their income. |
|b. |divide their income among spending, taxes, and saving. |
|c. |buy all goods and services produced in the economy. |
|d. |Both (a) and (c) are correct. |

ANS: B DIF: 2 REF: 23-1
NAT: Analytic LOC: Understanding and applying economic models
TOP: Circular-flow diagram MSC: Interpretive

13. In the actual economy, goods and services are purchased by
|a. |households, but not firms or the government. |
|b. |households and firms, but not the government. |
|c. |households and the government, but not firms. |
|d. |households, firms, and the government. |

ANS: D DIF: 2 REF: 23-1
NAT: Analytic LOC: Understanding and applying economic models
TOP: Circular-flow diagram MSC: Interpretive

Sec02 - Measuring a Nation's Income - The Measurement of Gross Domestic Product

MULTIPLE CHOICE

1. GDP is defined as
|a. |the market value of all goods and services produced within a country in a given period of time. |
|b. |the market value of all goods and services produced by the citizens of a country, regardless of where they are living, |
| |in a given period of time. |
|c. |the market value of all final goods and services produced within a country in a given period of time. |
|d. |the market value of all final goods and services produced by the citizens of a country, regardless of where they are |
| |living, in a given period of time. |

ANS: C DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

2. Gross domestic product is defined as
|a. |the quantity of all final goods and services demanded within a country in a given period of time. |
|b. |the quantity of all final goods and services supplied within a country in a given period of time. |
|c. |the market value of all final goods and services produced within a country in a given period of time. |
|d. |Both (a) and (b) are correct. |

ANS: C DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

3. To compute GDP, we
|a. |add up the wages paid to all workers. |
|b. |add up the costs of producing all final goods and services. |
|c. |add up the market values of all final goods and services. |
|d. |take the difference between the market values of all final goods and services and the costs of producing those final |
| |goods and services. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

4. GDP adds together many different kinds of products into a single measure of the value of economic activity by using prices determined by
|a. |banks. |
|b. |economists. |
|c. |the government. |
|d. |markets. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

5. In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily,
|a. |values of goods and services based on surveys of consumers. |
|b. |market prices. |
|c. |consumer and producer surpluses. |
|d. |costs of producing goods and services. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

6. Gross domestic product adds together many different kinds of goods and services into a single measure of the value of economic activity. To do this, GDP makes use of
|a. |market prices. |
|b. |prices that government economists believe reflect the true value of goods and services to society. |
|c. |the assumption that quantities of goods and services produced are unchanged from year to year. |
|d. |the assumption that prices of goods and services are unchanged from year to year. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

7. In computing GDP, market prices are used to value final goods and services because
|a. |market prices do not change much over time, so it is easy to make comparisons between years. |
|b. |market prices reflect the values of goods and services. |
|c. |if market prices are out of line with how people value goods, the government sets price ceilings and price floors. |
|d. |None of the above is correct; market prices are not used in computing GDP. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

8. If the price of a DVD player is three times the price of a CD player, then a DVD player contributes
|a. |more than three times as much to GDP as does a CD player. |
|b. |less than three times as much to GDP as does a CD player. |
|c. |exactly three times as much to GDP as does a CD player. |
|d. |to GDP but a CD player does not contribute to GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

9. Which of the following is correct?
|a. |The market value of rental housing services is included in GDP, but the market value of owner-occupied housing services |
| |is not. |
|b. |The market value of owner-occupied housing services is included in GDP, but the market value of rental housing services |
| |is not. |
|c. |The market values of both owner-occupied housing services and rental housing services are included in GDP. |
|d. |Neither the market value of owner-occupied housing services nor the market value of rental housing services is included |
| |in GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

10. The value of the housing services provided by the economy's owner-occupied houses is
|a. |included in GDP, and the estimated rental values of the houses are used to place a value on these housing services. |
|b. |included in GDP, and the actual mortgage payments made on the houses are used to estimate the value of these rental |
| |services. |
|c. |excluded from GDP since these services are not sold in any market. |
|d. |excluded from GDP since the value of these housing services cannot be estimated with any degree of precision. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

11. Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose further that a current estimate of the value of the condominium owners' housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion?
|a. |GDP necessarily increases. |
|b. |GDP necessarily decreases. |
|c. |GDP is unaffected because neither the rent nor the estimate of the value of housing services is included in GDP. |
|d. |GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in |
| |GDP by the estimate of the value of housing services. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

12. James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent by doing so. How much do the housing services provided by the two houses contribute to GDP?
|a. |$0 |
|b. |$10,000 |
|c. |$12,000 |
|d. |$22,000 |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

13. GDP excludes most items that are produced and sold illegally and most items that are produced and consumed at home because
|a. |the quality of these items is not high enough to contribute value to GDP. |
|b. |measuring them is so difficult. |
|c. |the government wants to discourage the production and consumption of these items. |
|d. |these items are not reported on income tax forms. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

14. Estimates of the values of which of the following non-market goods or services are included in GDP?
|a. |the value of unpaid housework |
|b. |the value of vegetables and other foods that people grow in their gardens |
|c. |the estimated rental value of owner-occupied homes |
|d. |All of the above are included in GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

15. Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has
|a. |reduced measured GDP. |
|b. |not affected measured GDP. |
|c. |increased measured GDP only to the extent that the value of the restaurant meals exceeded the value of meals previously |
| |cooked at home. |
|d. |increased measured GDP by the full value of the restaurant meals. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

16. Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has
|a. |caused measured GDP to fall. |
|b. |not caused any change in measured GDP. |
|c. |caused measured GDP to rise. |
|d. |probably changed measured GDP, but in an uncertain direction; the direction of the change depends on the difference in |
| |the quality of the cleaning that has resulted. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

17. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which of the following statements is correct?
|a. |Only Ralph’s payments are included in GDP. |
|b. |Ralph’s payments as well as the estimated value of Mike’s mowing services are included in GDP. |
|c. |Neither Ralph’s payments nor the estimated value of Mike's mowing services is included in GDP. |
|d. |Ralph’s payments are definitely included in GDP, while the estimated value of Mike’s mowing services is included in GDP |
| |only if Mike voluntarily provides his estimate of that value to the government. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

18. If Susan switches from going to Speedy Lube for an oil change to changing the oil in her car herself, then GDP
|a. |necessarily rises. |
|b. |necessarily falls. |
|c. |will be unaffected because the same service is produced in either case. |
|d. |will be unaffected because car maintenance is not included in GDP. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

19. Which of the following is not included in GDP?
|a. |carrots grown in your garden and eaten by your family |
|b. |carrots purchased at a farmer’s market and eaten by your family |
|c. |carrots purchased at a grocery store and eaten by your family |
|d. |More than one of the above is not included in GDP. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

20. A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move
|a. |necessarily raises GDP. |
|b. |necessarily decreases GDP. |
|c. |doesn't change GDP because gambling is never included in GDP. |
|d. |doesn't change GDP because in either case his income is included. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

21. If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP
|a. |necessarily decreases. |
|b. |necessarily increases. |
|c. |doesn't change because both legal and illegal production are included in GDP. |
|d. |doesn't change because these activities are never included in GDP. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

22. Which of the following is included in GDP?
|a. |medical marijuana purchased from a government-run pharmacy by a glaucoma patient |
|b. |recreational marijuana purchased from a drug dealer by a college student |
|c. |recreational marijuana produced and consumed by a man in his attic |
|d. |All of the above are included in GDP. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

23. Marijuana is an illegal good and broccoli is a legal good. Which of the following statements is true?
|a. |Darin grows and sells marijuana to Lisa. When Darin and Lisa get married, GDP falls. |
|b. |Darin grows and sells marijuana to Lisa. When Darin and Lisa get married, GDP rises. |
|c. |Darin grows and sells broccoli to Lisa. When Darin and Lisa get married, GDP falls. |
|d. |Darin grows and sells broccoli to Lisa. When Darin and Lisa get married, GDP rises. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

24. Spots, Inc. produces ink and sells it to Write on Target, which makes pens. The ink produced by Spots, Inc. is called
|a. |an inventory good. |
|b. |a transitory good. |
|c. |a preliminary good. |
|d. |an intermediate good. |

ANS: D DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Intermediate goods MSC: Definitional

25. Which of the following statements is correct?
|a. |The value of intermediate goods is always included in GDP. |
|b. |The value of intermediate goods is included in GDP only if those goods were produced in the previous year. |
|c. |The value of intermediate goods is included in GDP only if those goods are added to firms’ inventories to be used or |
| |sold at a later date. |
|d. |The value of intermediate goods is never included in GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Interpretive

26. Grapes are
|a. |always counted as an intermediate good. |
|b. |counted as an intermediate good only if they are used to produce another good, such as wine. |
|c. |counted as an intermediate good only if they are consumed. |
|d. |counted as an intermediate good, whether they are used to produce another good or consumed. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Intermediate goods MSC: Applicative

27. Gasoline is considered a final good if it is sold by a
|a. |gasoline station to a bus company that operates a bus route between San Francisco and Los Angeles. |
|b. |pipeline operator to a gasoline station in San Francisco. |
|c. |gasoline station to a motorist in Los Angeles. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Intermediate goods MSC: Applicative

28. A steel company sells some steel to a bicycle company for $150. The bicycle company uses the steel to produce a bicycle, which it sells for $250. Taken together, these two transactions contribute
|a. |$150 to GDP. |
|b. |$250 to GDP. |
|c. |between $250 and $400 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle. |
|d. |$400 to GDP. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Applicative

29. Al’s Aluminum Company sells $1 million worth of aluminum to Shiny Foil Company, which uses the aluminum to make aluminum foil. Shiny Foil Company sells $4 million worth of aluminum foil to households. The transactions just described contribute how much to GDP?
|a. |$1 million |
|b. |$3 million |
|c. |$4 million |
|d. |$5 million |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Applicative

30. One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for $3.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP?
|a. |GDP increases by $2.00. |
|b. |GDP increases by $3.00. |
|c. |GDP increases by $5.00. |
|d. |GDP increases by $6.00. |

ANS: C DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Analytical

31. Suppose there are only two firms in an economy: Cowhide, Inc. produces leather and sells it to Couches, Inc., which produces and sells leather furniture. With each $1,000 of leather that it buys from Cowhide, Inc., Couches, Inc. produces a couch and sells it for $3,000. Neither firm had any inventory at the beginning of 2006. During that year, Cowhide produced enough leather for 20 couches. Couches, Inc. bought 80% of that leather for $16,000 and promised to buy the remaining 20% for $4,000 in 2007. Couches, Inc. produced 16 couches during 2006 and sold each one during that year for $3,000. What was the economy's GDP for the 2006?
|a. |$48,000 |
|b. |$52,000 |
|c. |$64,000 |
|d. |$68,000 |

ANS: B DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Analytical

32. Suppose there are only two firms in an economy: Rolling Rawhide produces rawhide and sells it to Chewy Chomp, Inc., which uses the rawhide to produce and sell dog chews. With each $2 of rawhide that it buys from Rolling Rawhide, Chewy Chomp, Inc. produces a dog chew and sells it for $5. Neither firm had any inventory at the beginning of 2007. During that year, Rolling Rawhide produced enough rawhide for 1000 dog chews. Chewy Chomp, Inc. bought 75% of that rawhide for $1500 and promised to buy the remaining 25% for $500 in 2008. Chewy Chomp, Inc. produced 750 dog chews during 2007 and sold each one during that year for $5. What was the economy's GDP for 2007?
|a. |$3750 |
|b. |$4250 |
|c. |$5250 |
|d. |$5750 |

ANS: B DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Analytical

33. In 2007, Corny Company grows and sells $2 million worth of corn to Tasty Cereal Company, which makes corn flakes. Tasty Cereal Company produces $6 million worth of corn flakes in 2007, with sales to households during the year of $4.5 million. The unsold $1.5 million worth of corn flakes remains in Tasty Cereal Company’s inventory at the end of 2007. The transactions just described contribute how much to GDP for 2007?
|a. |$4.5 million |
|b. |$6 million |
|c. |$6.5 million |
|d. |$8 million |

ANS: B DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Analytical

34. The total sales of all firms in the economy for a year
|a. |equals GDP for the year. |
|b. |is larger than GDP for the year. |
|c. |is smaller than GDP for the year. |
|d. |Any of the above is possible. |

ANS: B DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | Intermediate goods MSC: Analytical

35. Which of the following domestically produced items is not included in GDP?
|a. |a bottle of shampoo |
|b. |a hairdryer |
|c. |a haircut |
|d. |All of the above are included in GDP. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

36. Which of the following is not included in GDP?
|a. |a can of bug spray |
|b. |the services of an exterminator |
|c. |the honey produced and sold by a beekeeper |
|d. |All of the above are included in GDP. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

37. Gross domestic product includes all
|a. |legal and illegal goods, but it excludes all legal and illegal services. |
|b. |legal and illegal goods and all legal and illegal services. |
|c. |legal goods and services, but it excludes illegal goods and services. |
|d. |legal and illegal goods and legal services, but it excludes illegal services. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

38. Transactions involving items produced in the past, such as the sale of a 5-year-old automobile by a used car dealership or the purchase of an antique rocking chair by a person at a yard sale, are
|a. |included in current GDP because GDP measures the value of all goods and services sold in the current year. |
|b. |included in current GDP but valued at their original prices. |
|c. |not included in current GDP because GDP only measures the value of goods and services produced in the current year. |
|d. |not included in current GDP because these items have no current value. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

39. Which of the following events would cause GDP for 2007 to increase?
|a. |In February 2007, Amanda sells a 1996 Honda Accord to Isabella. |
|b. |In February 2007, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in April 2007. |
|c. |In December 2007, Isabella eats onions that she harvested from her backyard garden in October 2007. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

40. Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid $200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following statements is correct regarding the sale of the house?
|a. |The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP. |
|b. |The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP. |
|c. |The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be revised upward by |
| |$25,000. |
|d. |The 2006 sale affected neither 2005 GDP nor 2006 GDP. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

41. Tyler and Camille both live in Oklahoma. A new-car dealer in Oklahoma bought a new car from the manufacturer for $18,000 and sold it to Tyler for $22,000. Later that year, Tyler sold the car to Camille for $17,000. By how much did these transactions contribute to U.S. GDP for the year?
|a. |$18,000 |
|b. |$22,000 |
|c. |$39,000 |
|d. |$57,000 |

ANS: B DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

42. Consider two cars manufactured by Chevrolet in 2007. During 2007, Chevrolet sells one of the two cars to Sean for $24,000. Later in the same year, Sean sells the car to Kati for $19,000. The second automobile, with a market value of $30,000, is unsold at the end of 2007 and it remains in Chevrolet’s inventory. The transactions just described contribute how much to GDP for 2007?
|a. |$24,000 |
|b. |$43,000 |
|c. |$54,000 |
|d. |$73,000 |

ANS: C DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

43. Which of the following is included in U.S. GDP?
|a. |the value of production by an American working in Morocco |
|b. |the value of production by a Moroccan working in the U.S. |
|c. |Both (a) and (b) are correct. |
|d. |Neither (a) nor (b) is correct. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

44. Anna, a U.S. citizen, works only in Germany. The value she adds to production in Germany is included
|a. |in both German GDP and U.S. GDP. |
|b. |in German GDP, but it is not included in U.S. GDP. |
|c. |in U.S. GDP, but it is not included in German GDP. |
|d. |in neither German GDP nor U.S. GDP. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

45. An American company operates a fast food restaurant in Romania. Which of the following statements is accurate?
|a. |The value of the goods and services produced by the restaurant is included in both Romanian GDP and U.S. GDP. |
|b. |One-half of the value of the goods and services produced by the restaurant is included in Romanian GDP, and the other |
| |one-half of the value is included in U.S. GDP. |
|c. |The value of the goods and services produced by the restaurant is included in Romanian GDP, but not in U.S. GDP. |
|d. |The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in Romanian GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

46. Quality Motors is a Japanese-owned company that produces automobiles; all of its automobiles are produced in American plants. In 2007, Quality Motors produced $20 million worth of automobiles, with $12 million in sales to Americans, $6 million in sales to Canadians, and $2 million worth of automobiles added to Quality Motors’ inventory. The transactions just described contribute how much to U.S. GDP for 2007?
|a. |$12 million |
|b. |$14 million |
|c. |$20 million |
|d. |$34 million |

ANS: C DIF: 3 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

47. Which of the following items is included in U.S. GDP?
|a. |goods produced by foreign citizens working in the United States |
|b. |the difference in the price of the sale of an existing home and its original purchase price |
|c. |known illegal activities |
|d. |None of the above is included in U.S. GDP. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

48. Which of the following items is included in U.S. GDP?
|a. |final goods and services that are purchased by the U.S. federal government |
|b. |intermediate goods that are produced in the U.S. but that are unsold at the end of the GDP accounting period |
|c. |goods and services produced by foreign citizens working in the U.S. |
|d. |All of the above are included in U.S. GDP. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

49. Which of the following items is included in U.S. GDP?
|a. |the estimated value of production accomplished at home, such as backyard production of fruits and vegetables |
|b. |the value of illegally-produced goods and services |
|c. |the value of cars and trucks produced in foreign countries and sold in the U.S. |
|d. |None of the above is included in U.S. GDP. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

50. Which of the following is not included in U.S. GDP?
|a. |unpaid cleaning and maintenance of houses |
|b. |services such as those provided by lawyers and hair stylists |
|c. |the estimated rental value of owner-occupied housing |
|d. |production of foreign citizens living in the United States |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

51. Which of the following values would be included in U.S. GDP for 2006?
|a. |the rent that John, an American citizen, would have paid on his home in New York in 2006 had he not owned that home |
|b. |the rent that Sarah, an American citizen, paid on her apartment in San Francisco in 2006 |
|c. |the value of the legal services provided by Carlos, an attorney and a Mexican citizen, who lived in Houston and |
| |practiced law there in 2006 |
|d. |All of the above would be included in U.S. GDP for 2006. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

52. Which of the following examples of production of goods and services would be included in U.S. GDP?
|a. |Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada. |
|b. |Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta home. |
|c. |Leo, an American citizen, grows marijuana in his Seattle home and sells it to his friends and neighbors. |
|d. |None of the above examples of production would be included in U.S. GDP. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

53. Which of the following transactions adds to U.S. GDP for 2006?
|a. |In 2006, Ashley sells a car that she bought in 2002 to William for $5,000. |
|b. |An American management consultant works in Mexico during the summer of 2006 and earns the equivalent of $30,000 during |
| |that time. |
|c. |When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and |
| |Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 |
| |per month. |
|d. |None of the above transactions adds to U.S. GDP for 2006. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

54. Which of the following transactions adds to U.S. GDP for 2006?
|a. |In 2006, Marvin Windows manufactures 20 windows that will eventually be installed in an office building in Minneapolis. |
| |The windows remain in Marvin’s inventory at the end of 2006. |
|b. |An Irish marketing consultant works in Boston during the summer of 2006 and earns $30,000 during that time. |
|c. |When Tim and Tina were both single, they lived in separate apartments and each paid $750 in rent. Tim and Tina got |
| |married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,550 per month. |
|d. |All of the above transactions add to U.S. GDP for 2006. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

55. The government of Wrexington, a country which has adopted American GDP accounting conventions, reported that GDP in quarter 3 was $12 billion at an annual rate. This means that the market value of all final goods and services produced within Wrexington in quarter 3 was
|a. |$3 billion. |
|b. |$4 billion. |
|c. |$12 billion. |
|d. |$48 billion. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

56. The government of Wrexington, a country which has adopted American GDP accounting conventions, has calculated that the seasonally-adjusted market value of all final goods and services produced within Wrexington in quarter 1 was $5 billion. The government will report that GDP in quarter 1 was
|a. |$1.25 billion at an annual rate. |
|b. |$4 billion at an annual rate. |
|c. |$5 billion at an annual rate. |
|d. |$20 billion at an annual rate. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

57. In a certain small country, the unit of currency is the huck. That country’s government recently announced that "GDP amounted to 400 million hucks in the quarter that just ended." Assuming this country has adopted American GDP accounting conventions, this statement means that GDP,
|a. |without seasonal adjustment, amounted to 100 million hucks in the quarter that just ended. |
|b. |with seasonal adjustment, amounted to 100 million hucks in the quarter that just ended. |
|c. |without seasonal adjustment, amounted to 400 million hucks in the quarter that just ended. |
|d. |with seasonal adjustment, amounted to 400 million hucks in the quarter that just ended. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

58. In a certain small country, the unit of currency is the huck. That country’s government recently announced that "GDP amounted to 400 million hucks in the quarter that just ended." Assuming this country has adopted American GDP accounting conventions, this statement means that GDP, after seasonal adjustment, actually amounted to
|a. |100 million hucks in the quarter that just ended. |
|b. |100 million hucks over the last four quarters, including the one that just ended. |
|c. |400 million hucks in the quarter that just ended. |
|d. |400 million hucks over the last four quarters, including the one that just ended. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

59. Suppose the government reports that U.S. GDP was about $13 trillion dollars in the most recent quarter. What is the correct interpretation of this number?
|a. |This number reflects the actual value of final goods and services produced in that quarter. |
|b. |This number was obtained by taking the actual value of final goods and services produced in that quarter, then |
| |seasonally adjusting that value. |
|c. |This number was obtained by taking the actual value of final goods and services produced in that quarter, then |
| |multiplying that value by 4. |
|d. |This number was obtained by taking the actual value of final goods and services produced in that quarter, then |
| |seasonally adjusting that value and multiplying it by 4. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

60. In the nation of Paolaland, quarterly GDP is always higher in the second quarter than in other quarters. In order to account systematically for this predictable second-quarter jump in GDP, Paolaland's government statisticians will
|a. |employ a statistical procedure called seasonal adjustment. |
|b. |report a four-quarter moving average of GDP rather than the one-quarter figure. |
|c. |report GNP rather than GDP. |
|d. |report personal income rather than GDP. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

61. The statistical discrepancy that regularly arises in national income accounting refers to the slight difference between
|a. |personal income and personal disposable income. |
|b. |estimates of GDP and actual GDP. |
|c. |the income and expenditure approaches to the calculation of GDP. |
|d. |the quarterly and annual approaches to the calculation of GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

62. Which government entity computes U.S. GDP every three months?
|a. |the Council of Economic Advisers |
|b. |the Department of Commerce |
|c. |the Department of Treasury |
|d. |the Federal Reserve |

ANS: B DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: U.S. Department of Commerce MSC: Definitional

63. Which of the following correctly orders U.S. income measures from largest to smallest?
|a. |disposable personal income, gross national product, national income, net national product, personal income |
|b. |personal income, net national product, national income, gross national product, disposable personal income |
|c. |gross national product, net national product, national income, personal income, disposable personal income |
|d. |disposable personal income, personal income, national income, net national product, gross national product |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income MSC: Interpretive

64. U.S. GDP and U.S. GNP are related as follows:
|a. |GNP = GDP + Value of exported goods - Value of imported goods. |
|b. |GNP = GDP - Value of exported goods + Value of imported goods. |
|c. |GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad. |
|d. |GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | GNP MSC: Interpretive

65. How does U.S. gross domestic product (GDP) differ from U.S. gross national product (GNP)?
|a. |GNP = GDP - losses from depreciation |
|b. |GNP = GDP + income earned by U.S. citizens abroad - income that foreign citizens earned in the U.S. |
|c. |GNP = GDP + income earned by corporations |
|d. |GNP = GDP - depreciation - retained earnings |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | GNP MSC: Interpretive

66. Darla, a Canadian citizen, works only in the United States. The value of the output she produces is
|a. |included in both U.S. GDP and U.S. GNP. |
|b. |included in U.S. GDP, but it is not included in U.S. GNP. |
|c. |included in U.S. GNP, but it is not included in U.S. GDP. |
|d. |included in neither U.S. GDP nor U.S. GNP. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | GNP MSC: Applicative

67. Greg, a U.S. citizen, works only in Canada. The value of the output he produces is
|a. |included in both U.S. GDP and U.S. GNP. |
|b. |included in U.S. GDP, but it is not included in U.S. GNP. |
|c. |included in U.S. GNP, but it is not included in U.S. GDP. |
|d. |included in neither U.S. GDP nor U.S. GNP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | GNP MSC: Applicative

68. An Italian company operates a pasta restaurant in the U.S. The value of the output produced by this pasta restaurant is included in
|a. |U.S. GNP and Italian GNP. |
|b. |U.S. GNP and Italian GDP. |
|c. |U.S. GDP and Italian GNP. |
|d. |U.S. GDP and Italian GDP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | GNP MSC: Applicative

69. Gina, a U.S. citizen, works only in Germany. The value of Gina’s production is included in
|a. |U.S. GDP and German GDP. |
|b. |U.S. GDP and German GNP. |
|c. |U.S. GNP and German GDP. |
|d. |U.S. GNP and German GNP. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP | GNP MSC: Applicative

70. Which of the following is not correct?
|a. |GNP equals net national product plus losses from depreciation. |
|b. |For most countries, including the United States, GDP and GNP are nearly the same. |
|c. |GDP and GNP typically move in opposite directions. |
|d. |Personal income equals disposable personal income plus personal taxes plus certain nontax payments. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income MSC: Interpretive

71. How is net national product (NNP) calculated?
|a. |Saving is subtracted from the total income of a nation’s citizens. |
|b. |Saving is subtracted from the total income of a nation’s permanent residents. |
|c. |Depreciation losses are subtracted from the total income of a nation’s citizens. |
|d. |Depreciation losses are subtracted from the total income of a nation’s permanent residents. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: NNP MSC: Interpretive

72. In the national income accounts, depreciation is called
|a. |"consumption of fixed capital." |
|b. |"negative investment." |
|c. |"capital taxation." |
|d. |"loss due to wear." |

ANS: A DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Depreciation MSC: Definitional

73. Which of the following is an example of depreciation?
|a. |falling stock prices |
|b. |the retirement of several employees |
|c. |computers becoming obsolete |
|d. |All of the above are examples of depreciation. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Depreciation MSC: Applicative

74. National income is defined as
|a. |the total income of a nation’s permanent residents minus losses from depreciation. |
|b. |the income that households and noncorporate businesses receive. |
|c. |the total income earned by a nation’s permanent residents in the production of goods and services. |
|d. |the income that households and noncorporate businesses have left after satisfying all their obligations to the |
| |government. |

ANS: C DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: National income MSC: Definitional

75. National income differs from net national product in that it includes business subsidies and excludes
|a. |profits of corporations. |
|b. |indirect business taxes. |
|c. |retained earnings of corporations. |
|d. |depreciation. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: National income | NNP MSC: Interpretive

76. The income that households and noncorporate businesses receive is called
|a. |personal income. |
|b. |net national product. |
|c. |disposable personal income. |
|d. |national income. |

ANS: A DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Personal income MSC: Definitional

77. Unlike national income, personal income
|a. |includes retained earnings, corporate income taxes and social insurance contributions, and excludes interest and |
| |transfer payments received by households from government. |
|b. |excludes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer payments |
| |received by households from government. |
|c. |excludes retained earnings, corporate income taxes and social insurance contributions, and includes interest and |
| |transfer payments received by households from government. |
|d. |includes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer payments |
| |received by households from government. |

ANS: C DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Personal income MSC: Interpretive

78. Retained earnings is income that
|a. |households retain after paying taxes. |
|b. |businesses retain after paying taxes. |
|c. |corporations have earned but have not used to invest in plant, equipment, and inventories. |
|d. |corporations have earned but have not paid out to their owners. |

ANS: D DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Retained earnings MSC: Definitional

79. Disposable personal income is the income that
|a. |households have left after paying taxes and non-tax payments to the government. |
|b. |businesses have left after paying taxes and non-tax payments to the government. |
|c. |households and noncorporate businesses have left after paying taxes and non-tax payments to the government. |
|d. |households and businesses have left after paying taxes and non-tax payments to the government. |

ANS: C DIF: 1 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Disposable personal income MSC: Definitional

Table 23-1

The table below contains data for the country of Wrexington for the year 2006.

|GDP |$110 |
|Income earned by citizens abroad |$5 |
|Income foreigners earn here |$15 |
|Losses from depreciation |$4 |
|Indirect business taxes |$6 |
|Business subsidies |$2 |
|Statistical discrepancy |$0 |
|Retained earnings |$5 |
|Corporate income taxes |$6 |
|Social insurance contributions |$10 |
|Interest paid to households by government |$5 |
|Transfer payments to households from government |$15 |
|Personal taxes |$30 |
|Nontax payments to government |$5 |

80. Refer to Table 23-1. The market value of all final goods and services produced within Wrexington in 2006 is
|a. |$100. |
|b. |$110. |
|c. |$115. |
|d. |$130. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

81. Refer to Table 23-1. Gross national product for Wrexington in 2006 is
|a. |$100. |
|b. |$110. |
|c. |$115. |
|d. |$130. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GNP MSC: Applicative

82. Refer to Table 23-1. Net national product for Wrexington in 2006 is
|a. |$96. |
|b. |$104. |
|c. |$106. |
|d. |$114. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: NNP MSC: Applicative

83. Refer to Table 23-1. National income for Wrexington in 2006 is
|a. |$88. |
|b. |$92. |
|c. |$100. |
|d. |$104. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: National income MSC: Applicative

84. Refer to Table 23-1. Personal income for Wrexington in 2006 is
|a. |$51. |
|b. |$91. |
|c. |$93. |
|d. |$133. |

ANS: B DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Personal income MSC: Applicative

85. Refer to Table 23-1. Disposable personal income for Wrexington in 2006 is
|a. |$56. |
|b. |$66. |
|c. |$116. |
|d. |$126. |

ANS: A DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Disposable personal income MSC: Applicative

86. For monitoring fluctuations in the national economy, which measure of income is best?
|a. |GDP |
|b. |GNP |
|c. |NNP |
|d. |It does not matter very much which measure we use. |

ANS: D DIF: 2 REF: 23-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income MSC: Interpretive

Sec03 - Measuring a Nation's Income - The Components of GDP

MULTIPLE CHOICE

1. In the equation Y = C + I + G + NX,
|a. |Y represents the economy’s total expenditure. |
|b. |C represents household expenditures on services and durable goods. |
|c. |all of the variables are always positive numbers. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

2. GDP is equal to
|a. |the market value of all final goods and services produced within a country in a given period of time. |
|b. |Y. |
|c. |C + I + G + NX. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

3. An identity is an equation that
|a. |describes an equilibrium. |
|b. |pertains to macroeconomics, not to microeconomics. |
|c. |must be true because of how the variables in the equation are defined. |
|d. |involves final goods, not intermediate goods. |

ANS: C DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Identity MSC: Definitional

4. The consumption component of GDP includes spending on
|a. |durable goods and nondurable goods, but not spending on services. |
|b. |durable goods and services, but not spending on nondurable goods. |
|c. |nondurable goods and services, but not spending on durable goods. |
|d. |durable goods, nondurable goods, and services. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Interpretive

5. Consumption consists of spending by households on goods and services, with the exception of
|a. |purchase of intangible services. |
|b. |purchases of durable goods. |
|c. |purchases of new houses. |
|d. |spending on education. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Interpretive

6. Which of the following is not an example of a durable good?
|a. |a refrigerator |
|b. |an automobile |
|c. |a business suit |
|d. |a furnace |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Durable goods MSC: Applicative

7. Which of the following is not an example of a nondurable good?
|a. |a loaf of bread |
|b. |a pair of jeans |
|c. |a microwave |
|d. |a pound of bacon |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nondurable goods MSC: Applicative

8. When economists refer to intangible items, they are referring to such things as
|a. |illegal goods, and the value of such items is included in GDP. |
|b. |illegal goods, and the value of such items is excluded from GDP. |
|c. |consulting services and dental care, and the value of such items is included in GDP. |
|d. |consulting services and dental care, and the value of such items is excluded from GDP. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Services MSC: Applicative

9. Household spending on education is included in
|a. |consumption, although it might be argued that it would fit better in investment. |
|b. |investment, although it might be argued that it would fit better in consumption. |
|c. |government spending, based on the fact that most higher-education students attend publicly-supported colleges and |
| |universities. |
|d. |None of the above is correct; in general, household spending on services is not included in any component of GDP. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Interpretive

10. Household spending on education is counted in which component or subcomponent of GDP?
|a. |consumption of durable goods |
|b. |consumption of nondurable goods |
|c. |consumption of services |
|d. |investment |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Interpretive

11. Which of the following is included in the consumption component of U.S. GDP?
|a. |purchases of staplers, paper clips, and pens by U.S. business firms |
|b. |purchases of natural gas by U.S. households |
|c. |purchases of newly constructed homes by U.S. households |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Applicative

12. If you buy a burger and fries at your favorite fast food restaurant,
|a. |then neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at |
| |the restaurant. |
|b. |then GDP will be higher, but consumption spending will be unchanged. |
|c. |then GDP will be unchanged, but consumption spending will be higher. |
|d. |then both GDP and consumption spending will be higher. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | GDP MSC: Applicative

13. For the purpose of calculating GDP, investment is spending on
|a. |stocks, bonds, and other financial assets. |
|b. |real estate and financial assets such as stocks and bonds. |
|c. |capital equipment, inventories, and structures, including household purchases of new housing. |
|d. |capital equipment, inventories, and structures, excluding household purchases of new housing. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Interpretive

14. What word do economists use to refer to the purchase of goods that will be used in the future to produce more goods and services?
|a. |capital |
|b. |consumption |
|c. |investment |
|d. |costs |

ANS: C DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Definitional

15. Which of the following is included in the investment component of GDP?
|a. |households’ purchases of newly constructed homes |
|b. |net additions to firms’ inventories |
|c. |firms’ purchases of capital equipment |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Interpretive

16. Which of the following examples of household spending is categorized as investment rather than consumption?
|a. |expenditures on durable goods such as automobiles and refrigerators |
|b. |expenditures on intangibles items such as medical care |
|c. |expenditures on new housing |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Applicative

17. Which of the following items is the one type of household expenditure that is categorized as investment rather than consumption?
|a. |spending on education |
|b. |the purchase of stocks and bonds |
|c. |the purchase of a new house |
|d. |the purchase of durable goods such as stoves and washing machines |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Applicative

18. Consider two items that might be included in GDP: (1) the estimated rental value of owner-occupied housing and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is calculated?
|a. |Both item (1) and item (2) are included in the consumption component of GDP. |
|b. |Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP.|
|c. |Item (1) is included in the investment component of GDP, while item (2) is included in the consumption component of GDP.|
|d. |Only item (2) is included in GDP, and it is included in the investment component. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | Investment MSC: Applicative

19. A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes
|a. |a positive contribution both to investment and to GDP. |
|b. |a positive contribution both to consumption and to GDP. |
|c. |a positive contribution to GDP, but it does not affect investment or consumption. |
|d. |a positive contribution to investment, but it does not affect GDP. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment | GDP MSC: Applicative

20. A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,
|a. |U.S. investment and GDP increase, but German GDP is unaffected. |
|b. |U.S. investment and German GDP increase, but U.S. GDP is unaffected. |
|c. |U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods. |
|d. |U.S. investment, U.S. GDP, and German GDP all increase. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment | GDP MSC: Applicative

21. A wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located in Connecticut that uses workers who live in Connecticut. As a result,
|a. |U.S. investment, GDP, and GNP all increase by the same amount. |
|b. |U.S. investment increases, but GDP and GNP are unaffected by the purchase. |
|c. |U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller amount. |
|d. |U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a smaller amount. |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment | GDP | GNP MSC: Analytical

22. The value of goods added to a firm's inventory in a certain year is treated as
|a. |consumption, since the goods will be sold to consumers in another period. |
|b. |saving, since the goods are being saved until they are sold in another period. |
|c. |investment, since GDP aims to measure the value of the economy's production that year. |
|d. |spending on durable goods, since the goods could not be inventoried unless they were durable. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Inventory MSC: Interpretive

23. Goods that go into inventory and are not sold during the current period are
|a. |counted as intermediate goods and so are not included in current period GDP. |
|b. |counted in current period GDP only if the firm that produced them sells them to another firm. |
|c. |included in current period GDP as inventory investment. |
|d. |included in current period GDP as consumption. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Inventory MSC: Interpretive

24. During the current quarter, a firm produces consumer goods and adds some of those goods to its inventory rather than selling them. The value of the goods added to inventory is
|a. |not included in the current quarter GDP. |
|b. |included in the current quarter GDP as investment. |
|c. |included in the current quarter GDP as consumption. |
|d. |included in the current quarter GDP as a statistical discrepancy. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Inventory MSC: Interpretive

25. During the third quarter of 2006, a firm produces consumer goods and adds some of those goods to its inventory. During the fourth quarter of 2006, the firm sells the goods at a retail outlet, with the result that the value of its inventory at the end of the fourth quarter is smaller than the value of its inventory at the end of the third quarter. These actions affect which component(s) of fourth-quarter GDP?
|a. |These actions affect only consumption, and they affect consumption positively. |
|b. |These actions affect only investment, and they affect investment positively. |
|c. |These actions affect consumption positively and investment negatively. |
|d. |These actions affect both consumption and investment positively. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | Investment MSC: Applicative

26. A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the second quarter, and holds the others in its warehouse. How will the 200,000 unsold DVDs be treated in the GDP statistics?
|a. |Since the DVDs eventually will be bought by consumers, they will be included as consumption in the second quarter. |
|b. |Since the DVDs were not purchased in the second quarter, they will be counted as an increase in third-quarter GDP. |
|c. |The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-quarter GDP. |
|d. |The DVDs will be counted as a change in inventory in the second quarter, and when sold in the third quarter will raise |
| |third-quarter GDP. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Inventory | GDP MSC: Applicative

27. The local Chevrolet dealership has an increase in inventory of 25 cars in 2006. In 2007, it sells all 25 cars. Which of the following statements is correct?
|a. |The value of the cars in inventory will be counted as part of 2006 GDP, and the value of the cars sold in 2007 will not |
| |increase 2007 GDP. |
|b. |The value of the cars in inventory will not affect 2006 GDP, and the value of the cars sold in 2007 will increase 2007 |
| |GDP. |
|c. |The value of the cars in inventory will be counted as part of 2006 GDP, and the value of the cars sold in 2007 will |
| |increase 2007 GDP. |
|d. |The value of the cars in inventory will not affect 2006 GDP, and the value of the cars sold in 2007 will not increase |
| |2007 GDP. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Inventory | GDP MSC: Applicative

28. A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. It follows that
|a. |the value of the good is added to the investment category of 2007 GDP and added to the investment category of 2008 GDP. |
|b. |the value of the good is added to the investment category of 2007 GDP and subtracted from the investment category of |
| |2008 GDP. |
|c. |the value of the good is subtracted from the investment category of 2007 GDP and added to the investment category of |
| |2008 GDP. |
|d. |the value of the good is subtracted from the investment category of 2007 GDP and subtracted from the investment category|
| |of 2008 GDP. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Applicative

29. A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. As a result, on net,
|a. |2007 GDP increased and 2008 GDP decreased. |
|b. |2007 GDP decreased and 2008 GDP increased. |
|c. |2007 GDP did not change and 2008 GDP increased. |
|d. |2007 GDP increased and 2008 GDP did not change. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

30. A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. It follows that
|a. |the value of the good is added to the investment category of 2007 GDP, added to the consumption category of 2008 GDP, |
| |and subtracted from the investment category of 2008 GDP. |
|b. |the value of the good is added to the investment category of 2007 GDP, added to the consumption category of 2008 GDP, |
| |and not included in the investment category of 2008 GDP. |
|c. |the value of the good is added to the investment category of 2007 GDP, subtracted from the consumption category of 2008 |
| |GDP, and not included in the investment category of 2008 GDP. |
|d. |the value of the good is added to the investment category of 2007 GDP, subtracted from the consumption category of 2008 |
| |GDP, and added to the investment category of 2008 GDP. |

ANS: A DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | Investment MSC: Analytical

31. Which of the following items is included in GDP?
|a. |the sale of stocks and bonds |
|b. |the sale of used goods |
|c. |the sale of services such as those performed by a doctor |
|d. |All of the above are included in GDP. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

32. Government purchases include spending on goods and services by
|a. |federal governments, but not by state or local governments. |
|b. |federal and state governments, but not by local governments. |
|c. |federal, state, and local governments. |
|d. |federal, state, and local governments, as well household spending by employees of those governments. |

ANS: C DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Definitional

33. Which of the following items is counted as part of government purchases?
|a. |The federal government pays the salary of a Navy officer. |
|b. |The state of Nevada pays a private firm to repair a Nevada state highway. |
|c. |The city of Las Vegas, Nevada pays a private firm to collect garbage in that city. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

34. Recently, the U.S. national income accounts have switched to calling government purchases
|a. |government spending and transfer payments. |
|b. |transfer payments and gross investment by government. |
|c. |government consumption expenditure and gross investment. |
|d. |government wages, salaries, and investment expenditure. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Definitional

35. A transfer payment is
|a. |a payment for moving expenses a worker receives when he or she is transferred by an employer to a new location. |
|b. |a payment that is automatically transferred from your bank account to pay a bill or some other obligation. |
|c. |a form of government spending that is not made in exchange for a currently produced good or service. |
|d. |the benefit that a person receives from an expenditure by government minus the taxes that were collected by government |
| |to fund that expenditure. |

ANS: C DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Definitional

36. Transfer payments
|a. |are payments that flow from government to households. |
|b. |are not made in exchange for currently produced goods or services. |
|c. |alter household income, but they do not reflect the economy’s production. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Interpretive

37. A transfer payment is a payment made by
|a. |consumers, but not in exchange for a tangible product. |
|b. |firms, but not in exchange for capital equipment. |
|c. |foreigners, but not in exchange for a domestically-produced good or service. |
|d. |government, but not in exchange for a currently produced good or service. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Interpretive

38. Transfer payments are
|a. |included in GDP because they represent income to individuals. |
|b. |included in GDP because they eventually will be spent on consumption. |
|c. |not included in GDP because they are not payments for currently produced goods or services. |
|d. |not included in GDP because taxes will have to be raised to pay for them. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Interpretive

39. Which of the following represents a transfer payment?
|a. |You transfer $1,000 from your bank account to a mutual fund. |
|b. |The government sends your grandfather his Social Security check. |
|c. |The bank transfers $10 in quarterly interest to your savings account. |
|d. |Your employer automatically transfers $100 each month from your wages to a non-taxable medical spending account. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Applicative

40. Social Security payments are
|a. |included in GDP because they represent payments for work performed in the past. |
|b. |included in GDP because they represent potential consumption. |
|c. |excluded from GDP because they are not private pensions. |
|d. |excluded from GDP because they do not reflect the economy’s production. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Applicative

41. Unemployment compensation is
|a. |part of GDP because it represents income. |
|b. |part of GDP because the recipients must have worked in the past to qualify. |
|c. |not part of GDP because it is a transfer payment. |
|d. |not part of GDP because the payments reduce business profits. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Applicative

42. To encourage formation of small businesses, the government could provide subsidies; these subsidies
|a. |would be included in GDP because they are part of government purchases. |
|b. |would be included in GDP because they are part of investment expenditures. |
|c. |would not be included in GDP because they are transfer payments. |
|d. |would not be included in GDP because the government raises taxes to pay for them. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Transfer payments MSC: Applicative

43. After the terrorist attacks on September 11, 2001, governments within the United States raised expenditures to increase security at airports. These purchases of goods and services are
|a. |not included in GDP since they do not represent production. |
|b. |not included in GDP since the government collects taxes to pay for them. |
|c. |included in GDP since government expenditures on goods and services are included in GDP. |
|d. |included in GDP only to the extent that the federal government, rather than state or local governments, paid for them. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

44. Which of the following items is counted as part of government purchases?
|a. |The federal government pays $2,000 in Social Security benefits to a retired person. |
|b. |The city of Des Moines, Iowa pays $10,000 to a tree-trimming firm to trim trees along city boulevards. |
|c. |The state of Iowa pays $1,000 to help a low-income family pay its medical bills. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

45. The U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2006. The economist then retires. In 2007, the government pays him $30,000 in retirement benefits. Which of the following is correct?
|a. |The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as |
| |government purchases. |
|b. |The 2006 payment is included in 2006 GDP as government purchases, but the 2007 payment is not included in 2007 GDP. |
|c. |The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as |
| |government transfer payments. |
|d. |The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is allocated to previous years' |
| |GDP according to the amount of work performed by the economist each year. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

46. Consider the following three items of spending by the government: (1) the federal government pays a $500 unemployment benefit to an unemployed person; (2) the federal government makes a $2,000 salary payment to a Navy lieutenant; (3) the city of Bozeman, Montana makes a $10,000 payment to ABC Lighting Company for street lights in Bozeman. Which of these payments contributes directly to government purchases in the national income accounts?
|a. |only item (1) |
|b. |only item (2) |
|c. |only items (1) and (2) |
|d. |only items (2) and (3) |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

47. Which of the following subcomponents of GDP can be either positive or negative?
|a. |inventory investment |
|b. |exports |
|c. |government purchases |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

48. Net exports equal
|a. |exports plus imports. |
|b. |exports minus imports. |
|c. |imports minus exports. |
|d. |GDP minus imports. |

ANS: B DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Definitional

49. Which of the following components or subcomponents of GDP can be either positive or negative?
|a. |consumers' spending on durable goods |
|b. |firms' spending on capital equipment |
|c. |net exports |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

50. If net exports is a negative number for a particular year, then
|a. |the value of firms’ inventories declined over the course of the year. |
|b. |consumption exceeded the sum of investment and government purchases during the year. |
|c. |the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year. |
|d. |the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Interpretive

51. If a U.S. citizen buys a television made in Korea by a Korean firm, then
|a. |U.S. net exports decrease and U.S. GDP decreases. |
|b. |U.S. net exports are unaffected and U.S. GDP decreases. |
|c. |U.S. net exports are unaffected and U.S. GDP is unaffected. |
|d. |U.S. net exports decrease and U.S. GDP is unaffected. |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports | GDP MSC: Applicative

52. A German citizen buys an automobile produced in the United States by a Japanese company. As a result,
|a. |U.S. net exports increase, U.S. GDP is unaffected, Japanese GNP increases, German net exports decrease, and German GNP |
| |and GDP are unaffected. |
|b. |U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GNP is unaffected, |
| |and German GDP decreases. |
|c. |U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GNP and GDP are |
| |unaffected. |
|d. |U.S. net exports and GDP are unaffected, Japanese GNP increases, and German net exports, GNP, and GDP decrease. |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports | GDP | GNP MSC: Analytical

53. If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then
|a. |U.S. consumption increases, U.S. net exports decrease, and U.S. GDP decreases. |
|b. |U.S. consumption increases, U.S. net exports decrease, and U.S. GDP is unaffected. |
|c. |U.S. consumption decreases, U.S. net exports increase, and U.S. GDP increases. |
|d. |U.S. consumption decreases, U.S. net exports increase, and U.S. GDP is unaffected. |

ANS: B DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | Net exports | GDP MSC: Analytical

54. When an American household purchases a bottle of Italian wine for $100,
|a. |U.S. consumption does not change, U.S. net exports decrease by $100, and U.S. GDP decreases by $100. |
|b. |U.S. consumption does not change, U.S. net exports increase by $100, and U.S. GDP increases by $100. |
|c. |U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change. |
|d. |U.S. consumption increases by $100, U.S. net exports do not change, and U.S. GDP increases by $100. |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption | Net exports | GDP MSC: Analytical

55. When an Egyptian firm purchases a cement mixer from Slovakia,
|a. |Egyptian investment does not change, Egyptian net exports decrease, Egyptian GDP decreases, Slovakian net exports |
| |increase, and Slovakian GDP increases. |
|b. |Egyptian investment increases, Egyptian net exports decrease, Egyptian GDP is unaffected, Slovakian net exports |
| |increase, and Slovakian GDP increases. |
|c. |Egyptian investment decreases, Egyptian net exports increase, Egyptian GDP is unaffected, Slovakian net exports |
| |decrease, and Slovakian GDP decreases. |
|d. |Egyptian investment increases, Egyptian net exports do not change, Egyptian GDP increases, Slovakian net exports do not |
| |change, and Slovakian GDP is unaffected. |

ANS: B DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment | Net exports | GDP MSC: Analytical

56. The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result,
|a. |U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; and U.S. GDP is unaffected. |
|b. |U.S. government purchases increase by $30,000; U.S. net exports are unaffected; and U.S. GDP increases by $30,000. |
|c. |U.S. government purchases, net exports, and GDP are unaffected. |
|d. |U.S. government purchases are unaffected; U.S. net exports decrease by $30,000; and U.S. GDP decreases by $30,000. |

ANS: A DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases | Net exports | GDP MSC: Analytical

57. An Iowan receives a Social Security check for $500, which he uses to purchase a $480 television made in Japan by a Japanese firm and a $20 dinner at a local restaurant. As a result, U.S. GDP
|a. |does not change. |
|b. |increases by $20. |
|c. |increases by $520. |
|d. |increases by $1000. |

ANS: B DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

58. An American soldier stationed in California receives a paycheck from the federal government for $500, which she uses to purchase a $300 stereo made in Korea by a Korean firm and $200 worth of groceries produced in California. As a result, U.S. GDP increases by
|a. |$200. |
|b. |$500. |
|c. |$700. |
|d. |$1000. |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

59. In the economy of Wrexington in 2008, consumption was $1000, exports were $100, government purchases were $450, imports were $150, and investment was $350. What was Wrexington’s GDP in 2008?
|a. |$1750 |
|b. |$1850 |
|c. |$1900 |
|d. |$2050 |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

60. In the economy of Wrexington in 2008, consumption was $5000, exports were $100, government purchases were $900, imports were $200, and investment was $1000. What was Wrexington’s GDP in 2008?
|a. |$6700 |
|b. |$6800 |
|c. |$7000 |
|d. |$7200 |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

61. In the economy of Wrexington in 2008, exports were $200, GDP was $2000, government purchases were $300, imports were $130, and investment was $400. What was Wrexington’s consumption in 2008?
|a. |$970 |
|b. |$1230 |
|c. |$1370 |
|d. |$1630 |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Applicative

62. In the economy of Wrexington in 2008, exports were $500, GDP was $6400, government purchases were $1500, imports were $600, and investment was $2000. What was Wrexington’s consumption in 2008?
|a. |$1800 |
|b. |$2800 |
|c. |$3000 |
|d. |$4000 |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Applicative

63. In the economy of Wrexington in 2008, consumption was $6000, exports were $1000, GDP was $10,000, government purchases were $2000, and imports were $600. What was Wrexington’s investment in 2008?
|a. |$1400 |
|b. |$1600 |
|c. |$2400 |
|d. |$3600 |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Applicative

64. In the economy of Wrexington in 2008, consumption was $3000, exports were $200, GDP was $8000, government purchases were $1000, and imports were $600. What was Wrexington’s investment in 2008?
|a. |$3200 |
|b. |$3600 |
|c. |$3800 |
|d. |$4400 |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Applicative

65. In the economy of Wrexington in 2008, consumption was $3000, exports were $400, GDP was $5000, imports were $600, and investment was $1100. What were Wrexington’s government purchases in 2008?
|a. |$300 |
|b. |$500 |
|c. |$700 |
|d. |$1100 |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

66. In the economy of Wrexington in 2008, consumption was $4000, exports were $800, GDP was $9500, imports were $200, and investment was $1000. What were Wrexington’s government purchases in 2008?
|a. |$3700 |
|b. |$3900 |
|c. |$5100 |
|d. |$5500 |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Applicative

67. In the economy of Wrexington in 2008, consumption was $200, exports were $50, GDP was $325, government purchases were $100, imports were $125, and investment was $100. What were Wrexington’s net exports in 2008?
|a. |-$75 |
|b. |-$50 |
|c. |$50 |
|d. |$75 |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Applicative

68. In the economy of Wrexington in 2008, consumption was $800, GDP was $2000, government purchases were $400, and investment was $600. What were Wrexington’s net exports in 2008?
|a. |-$200 |
|b. |$200 |
|c. |$1800 |
|d. |Net exports cannot be calculated from the information given. |

ANS: B DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Applicative

69. In the economy of Wrexington in 2008, consumption was $1000, GDP was $1950, government purchases were $500, and investment was $700. What were Wrexington’s net exports in 2008?
|a. |-$250 |
|b. |$250 |
|c. |$2200 |
|d. |Net exports cannot be calculated from the information given. |

ANS: A DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Applicative

70. In the economy of Wrexington in 2008, consumption was $5300, GDP was $8800, government purchases were $1800, imports were $500, and investment was $2000. What were Wrexington’s exports in 2008?
|a. |-$800 |
|b. |-$300 |
|c. |$200 |
|d. |$300 |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Exports MSC: Applicative

71. In the economy of Wrexington in 2008, consumption was $3000, GDP was $5500, government purchases were $1000, imports were $2000, and investment was $1000. What were Wrexington’s exports in 2008?
|a. |-$1500 |
|b. |$500 |
|c. |$1500 |
|d. |$2500 |

ANS: D DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Exports MSC: Applicative

72. In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was $4800, government purchases were $840, and investment was $1400. What were Wrexington’s imports in 2008?
|a. |-$560 |
|b. |-$240 |
|c. |$240 |
|d. |$560 |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Imports MSC: Applicative

73. In the economy of Wrexington in 2008, consumption was $500, exports were $200, GDP was $1200, government purchases were $250, and investment was $300. What were Wrexington’s imports in 2008?
|a. |-$150 |
|b. |-$50 |
|c. |$50 |
|d. |$150 |

ANS: C DIF: 2 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Imports MSC: Applicative

74. In the economy of Wrexington in 2008, consumption was one-half of GDP, government purchases were $2000 more than investment, investment was one-sixth of GDP, and the value of imports exceeded the value of exports by $500. What was Wrexington’s GDP in 2008?
|a. |$3000 |
|b. |$4500 |
|c. |$9000 |
|d. |$15,000 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

75. In the economy of Wrexington in 2008, consumption was 60% of GDP, government purchases were $212, imports were $67 and 67% of the value of exports, investment was one-half of the value of consumption. What was Wrexington’s GDP in 2008?
|a. |$1450 |
|b. |$1790 |
|c. |$2455 |
|d. |$2790 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

Table 23-2

The table below contains data for the country of Wrexington for the year 2008.

|Household purchases of durable goods |$1293 |
|Household purchases of nondurable goods |$1717 |
|Household purchases of services |$301 |
|Household purchases of new housing |$704 |
|Purchases of capital equipment |$310 |
|Inventory changes |$374 |
|Purchases of new structures |$611 |
|Depreciation |$117 |
|Salaries of government workers |$1422 |
|Government expenditures on public works |$553 |
|Transfer payments |$777 |
|Foreign purchases of domestically produced goods |$88 |
|Domestic purchases of foreign goods |$120 |

76. Refer to Table 23-2. What was Wrexington’s GDP in 2008?
|a. |$6359 |
|b. |$7136 |
|c. |$7253 |
|d. |$8147 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

77. Refer to Table 23-2. What was Wrexington’s consumption in 2008?
|a. |$2018 |
|b. |$3010 |
|c. |$3311 |
|d. |$4015 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Analytical

78. Refer to Table 23-2. What was Wrexington’s investment in 2008?
|a. |$1178 |
|b. |$1295 |
|c. |$1882 |
|d. |$1999 |

ANS: D DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Analytical

79. Refer to Table 23-2. What were Wrexington’s government purchases in 2008?
|a. |$553 |
|b. |$1198 |
|c. |$1975 |
|d. |$2752 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Analytical

80. Refer to Table 23-2. What were Wrexington’s exports in 2008?
|a. |-$32 |
|b. |$32 |
|c. |$88 |
|d. |$120 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Exports MSC: Analytical

81. Refer to Table 23-2. What were Wrexington’s imports in 2008?
|a. |-$32 |
|b. |$32 |
|c. |$88 |
|d. |$120 |

ANS: D DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Imports MSC: Analytical

82. Refer to Table 23-2. What were Wrexington’s net exports in 2008?
|a. |-$32 |
|b. |$32 |
|c. |$88 |
|d. |$120 |

ANS: A DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Analytical

Table 23-3

The table below contains data for the country of Wrexington for the year 2008.

|Total income |$5731 |
|Household purchases of durable goods |$1108 |
|Household purchases of nondurable goods |$702 |
|Household purchases of non-education services |$203 |
|Household purchases of education services |$302 |
|Household purchases of new housing |$816 |
|Purchases of capital equipment |$333 |
|Inventory changes |$75 |
|Purchases of new structures |$267 |
|Depreciation |$401 |
|Local government spending on goods and services |$236 |
|State government spending on goods and services |$419 |
|Federal government spending on goods and services |$1182 |
|Transfer payments |$707 |
|Foreign purchases of domestically produced goods |$217 |
|Domestic purchases of foreign goods |$129 |

83. Refer to Table 23-3. What was Wrexington’s GDP in 2008?
|a. |$4623 |
|b. |$5731 |
|c. |$6037 |
|d. |$6839 |

ANS: B DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Analytical

84. Refer to Table 23-3. What was Wrexington’s consumption in 2008?
|a. |$1810 |
|b. |$2013 |
|c. |$2315 |
|d. |$3131 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Analytical

85. Refer to Table 23-3. What was Wrexington’s investment in 2008?
|a. |$675 |
|b. |$1090 |
|c. |$1491 |
|d. |$1793 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Analytical

86. Refer to Table 23-3. What were Wrexington’s government purchases in 2008?
|a. |$1130 |
|b. |$1601 |
|c. |$1837 |
|d. |$2544 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Analytical

87. Refer to Table 23-3. What were Wrexington’s net exports in 2008?
|a. |-$217 |
|b. |-$88 |
|c. |$88 |
|d. |$217 |

ANS: C DIF: 3 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Analytical

88. In 2007, U.S. GDP was almost
|a. |$10 trillion. |
|b. |$14 trillion. |
|c. |$46 trillion. |
|d. |$302 trillion. |

ANS: B DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Definitional

89. In 2007, GDP per person in the United States was almost
|a. |$10,000. |
|b. |$14,000. |
|c. |$32,000. |
|d. |$46,000. |

ANS: D DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP per person MSC: Definitional

90. In the United States in 2007, consumption represented approximately
|a. |5 percent of GDP. |
|b. |15 percent of GDP. |
|c. |19 percent of GDP. |
|d. |70 percent of GDP. |

ANS: D DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Consumption MSC: Definitional

91. In the United States in 2007, purchases of capital equipment, inventories, and structures represented approximately
|a. |5 percent of GDP. |
|b. |15 percent of GDP. |
|c. |19 percent of GDP. |
|d. |70 percent of GDP. |

ANS: B DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Investment MSC: Definitional

92. In the United States in 2007, government purchases of goods and services were
|a. |larger than consumption, but smaller than investment. |
|b. |larger than investment, but smaller than consumption. |
|c. |smaller than both consumption and investment. |
|d. |larger than both consumption and investment. |

ANS: B DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Government purchases MSC: Definitional

93. In 2007, U.S. net exports were
|a. |positive and about 2 percent the size of GDP. |
|b. |positive and about 5 percent the size of GDP. |
|c. |negative and about 2 percent the size of GDP. |
|d. |negative and about 5 percent the size of GDP. |

ANS: D DIF: 1 REF: 23-3
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Net exports MSC: Definitional

Sec04 - Measuring a Nation's Income - Real versus Nominal GDP

MULTIPLE CHOICE

1. If total spending rises from one year to the next, then
|a. |the economy must be producing a larger output of goods and services. |
|b. |goods and services must be selling at higher prices. |
|c. |either the economy must be producing a larger output of goods and services, or goods and services must be selling at |
| |higher prices, or both. |
|d. |employment or productivity must be rising. |

ANS: C DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Definitional

2. If total spending rises from one year to the next, then which of the following could not be true?
|a. |the economy is producing a smaller output of goods and services, and goods and services are selling at higher prices |
|b. |the economy is producing a larger output of goods and services, and goods and services are selling at lower prices |
|c. |the economy is producing a larger output of goods and services, and goods and services are selling at higher prices |
|d. |the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Interpretive

3. When studying changes in the economy over time, economists want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services. In other words, economists want to study
|a. |nominal GDP. |
|b. |real GDP. |
|c. |the GDP deflator. |
|d. |GNP. |

ANS: B DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Definitional

4. Real GDP is the yearly production of final goods and services valued at
|a. |current prices. |
|b. |constant prices. |
|c. |expected future prices. |
|d. |the ratio of current prices to constant prices. |

ANS: B DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Definitional

5. Which of the following statements about GDP is correct?
|a. |Nominal GDP values production at current prices, whereas real GDP values production at constant prices. |
|b. |Nominal GDP values production at constant prices, whereas real GDP values production at current prices. |
|c. |Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in |
| |the production process. |
|d. |Nominal GDP consistently underestimates the value of production, whereas real GDP consistently overestimates the value |
| |of production. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP MSC: Interpretive

6. Which of the following is correct?
|a. |Nominal GDP measures base-year production using base-year prices, whereas real GDP measures current production using |
| |current prices. |
|b. |Nominal GDP measures current production using base-year prices, whereas real GDP measures current production using |
| |current prices. |
|c. |Nominal GDP measures current production using current prices, whereas real GDP measures base-year production using |
| |base-year prices. |
|d. |Nominal GDP measures current production using current prices, whereas real GDP measures current production using |
| |base-year prices. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP MSC: Interpretive

7. Which of the following is correct?
|a. |Nominal GDP never equals real GDP. |
|b. |Nominal GDP always equals real GDP. |
|c. |Nominal GDP equals real GDP in the base year. |
|d. |Nominal GDP equals real GDP in all years but the base year. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP MSC: Interpretive

8. Changes in nominal GDP reflect
|a. |only changes in prices. |
|b. |only changes in the amounts being produced. |
|c. |both changes in prices and changes in the amounts being produced. |
|d. |neither changes in prices nor changes in the amounts being produced. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Interpretive

9. Changes in real GDP reflect
|a. |only changes in prices. |
|b. |only changes in the amounts being produced. |
|c. |both changes in prices and changes in the amounts being produced. |
|d. |neither changes in prices nor changes in the amounts being produced. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Interpretive

10. Which of the following statements about nominal GDP and real GDP is correct?
|a. |Nominal GDP is a better gauge of economic well-being than is real GDP. |
|b. |Real GDP is a better gauge of economic well-being than is nominal GDP. |
|c. |Real GDP and nominal GDP are equally good measures of economic well-being. |
|d. |Nominal GDP reflects the economy’s ability to satisfy people’s needs and desires, but Real GDP does not. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP MSC: Interpretive

11. When economists talk about growth in the economy, they measure that growth as the
|a. |absolute change in nominal GDP from one period to another. |
|b. |percentage change in nominal GDP from one period to another. |
|c. |absolute change in real GDP from one period to another. |
|d. |percentage change in real GDP from one period to another. |

ANS: D DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic growth MSC: Definitional

12. The GDP deflator is the ratio of
|a. |real GDP to nominal GDP multiplied by 100. |
|b. |real GDP to the inflation rate multiplied by 100. |
|c. |nominal GDP to real GDP multiplied by 100. |
|d. |nominal GDP to the inflation rate multiplied by 100. |

ANS: C DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Definitional

13. Changes in the GDP deflator reflect
|a. |only changes in prices. |
|b. |only changes in the amounts being produced. |
|c. |both changes in prices and changes in the amounts being produced. |
|d. |neither changes in prices nor changes in the amounts being produced. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Interpretive

14. The GDP deflator for years subsequent to the base year measures the change in
|a. |nominal GDP from the base year that cannot be attributable to a change in real GDP. |
|b. |real GDP from the base year that cannot be attributable to a change in nominal GDP. |
|c. |nominal GDP from the base year that cannot be attributable to a change in prices. |
|d. |real GDP from the base year that cannot be attributable to a change in prices. |

ANS: A DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Definitional

15. In the base year, the GDP deflator is always
|a. |-1. |
|b. |0. |
|c. |1. |
|d. |100. |

ANS: D DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Definitional

16. The term economists use to describe a situation in which the economy’s overall price level is rising is
|a. |growth. |
|b. |inflation. |
|c. |recession. |
|d. |expansion. |

ANS: B DIF: 1 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

17. The inflation rate is the
|a. |absolute change in real GDP from one period to another. |
|b. |percentage change in real GDP from one period to another. |
|c. |absolute change in the price level from one period to another. |
|d. |percentage change in the price level from one period to another. |

ANS: D DIF: 1 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

18. The inflation rate in year 2 equals
|a. |[pic]. |
|b. |[pic]. |
|c. |[pic]. |
|d. |[pic]. |

ANS: A DIF: 1 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

19. If real GDP doubles and the GDP deflator doubles, then nominal GDP
|a. |remains constant. |
|b. |doubles. |
|c. |triples. |
|d. |quadruples. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Applicative

20. If nominal GDP doubles and the GDP deflator doubles, then real GDP
|a. |remains constant. |
|b. |doubles. |
|c. |triples. |
|d. |quadruples. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

21. In the economy of Wrexington in 2008, real GDP was $5 trillion and the GDP deflator was 200. What was Wrexington’s nominal GDP in 2008?
|a. |$2.5 trillion |
|b. |$10 trillion |
|c. |$40 trillion |
|d. |$100 trillion |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Applicative

22. In the economy of Wrexington in 2008, real GDP was $25 billion and the GDP deflator was 68. What was Wrexington’s nominal GDP in 2008?
|a. |$2.72 billion |
|b. |$17 billion |
|c. |$36.8 billion |
|d. |$43 billion |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Applicative

23. In the economy of Wrexington in 2008, nominal GDP was $18 billion and the GDP deflator was 120. What was Wrexington’s real GDP in 2008?
|a. |$6.7 billion |
|b. |$15 billion |
|c. |$21.6 billion |
|d. |$38 billion |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

24. In the economy of Wrexington in 2008, nominal GDP was $20 billion and the GDP deflator was 50. What was Wrexington’s real GDP in 2008?
|a. |$2.5 billion |
|b. |$10 billion |
|c. |$40 billion |
|d. |$100 billion |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

25. In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4 trillion. What was Wrexington’s GDP deflator in 2008?
|a. |25 |
|b. |40 |
|c. |250 |
|d. |400 |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

26. In the economy of Wrexington in 2008, nominal GDP was $28 trillion and real GDP was $32 trillion. What was Wrexington’s GDP deflator in 2008?
|a. |87.5 |
|b. |114.3 |
|c. |400 |
|d. |896 |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

27. If nominal GDP is $10 trillion and real GDP is $8 trillion, then the GDP deflator is
|a. |80, and this indicates that the price level has decreased by 20 percent since the base year. |
|b. |80, and this indicates that the price level has increased by 80 percent since the base year. |
|c. |125, and this indicates that the price level has increased by 25 percent since the base year. |
|d. |125, and this indicates that the price level has increased by 125 percent since the base year. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator | Inflation rate MSC: Applicative

28. If nominal GDP is $8 trillion and real GDP is $10 trillion, then the GDP deflator is
|a. |80, and this indicates that the price level has decreased by 20 percent since the base year. |
|b. |80, and this indicates that the price level has increased by 80 percent since the base year. |
|c. |125, and this indicates that the price level has increased by 25 percent since the base year. |
|d. |125, and this indicates that the price level has increased by 125 percent since the base year. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator | Inflation rate MSC: Applicative

29. Suppose an economy’s production consists only of corn and soybeans. In 2005, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2004, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2004 as the base year, it follows that, for 2005,
|a. |nominal GDP is $50, real GDP is $100, and the GDP deflator is 50. |
|b. |nominal GDP is $50, real GDP is $100, and the GDP deflator is 200. |
|c. |nominal GDP is $100, real GDP is $50, and the GDP deflator is 50. |
|d. |nominal GDP is $100, real GDP is $50, and the GDP deflator is 200. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

30. Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham are sold at $4 per pound. In 2004, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2005,
|a. |nominal GDP is $400, real GDP is $500, and the GDP deflator is 80. |
|b. |nominal GDP is $400, real GDP is $500, and the GDP deflator is 125. |
|c. |nominal GDP is $500, real GDP is $400, and the GDP deflator is 80. |
|d. |nominal GDP is $500, real GDP is $400, and the GDP deflator is 125. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

31. Suppose an economy produces only cranberries and maple syrup. In 2006, 50 units of cranberries are sold at $20 per unit and 100 units of maple syrup are sold at $8 per unit. In 2005, the base year, the price of cranberries was $10 per unit and the price of maple syrup was $15 per unit. For 2006,
|a. |nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 90. |
|b. |nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 111.1. |
|c. |nominal GDP is $2000, real GDP is $1800, and the GDP deflator is 90. |
|d. |nominal GDP is $2000, real GDP is $1800, and the GDP deflator is 111.1. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

32. Suppose an economy produces only cheese and fish. In 2008, 20 units of cheese are sold at $5 each and 8 units of fish are sold at $50 each. In 2007, the base year, the price of cheese was $10 per unit and the price of fish was $75 per unit. For 2008,
|a. |nominal GDP is $500, real GDP is $800, and the GDP deflator is 62.5. |
|b. |nominal GDP is $500, real GDP is $800, and the GDP deflator is 160. |
|c. |nominal GDP is $800, real GDP is $500, and the GDP deflator is 62.5. |
|d. |nominal GDP is $800, real GDP is $500, and the GDP deflator is 160. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

33. A country reported nominal GDP of $100 billion in 2008 and $75 billion in 2007. It also reported a GDP deflator of 125 in 2008 and 120 in 2007. Between 2007 and 2008,
|a. |real output and the price level both rose. |
|b. |real output rose and the price level fell. |
|c. |real output fell and the price level rose. |
|d. |real output and the price level both fell. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Price level MSC: Applicative

34. A country reported nominal GDP of $200 billion in 2008 and $180 billion in 2007. It also reported a GDP deflator of 125 in 2008 and 105 in 2007. Between 2007 and 2008,
|a. |real output and the price level both rose. |
|b. |real output rose and the price level fell. |
|c. |real output fell and the price level rose. |
|d. |real output and the price level both fell. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Price level MSC: Applicative

35. A country reported a nominal GDP of $115 billion in 2008 and $125 billion in 2007. It also reported a GDP deflator of 85 in 2008 and 100 in 2007. Between 2007 and 2008,
|a. |real output and the price level both rose. |
|b. |real output rose and the price level fell. |
|c. |real output fell and the price level rose. |
|d. |real output and the price level both fell. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Price level MSC: Applicative

36. A country reported a nominal GDP of $85 billion in 2008 and $100 billion in 2007. It also reported a GDP deflator of 100 in 2008 and 105 in 2007. Between 2007 and 2008,
|a. |real output and the price level both rose. |
|b. |real output rose and the price level fell. |
|c. |real output fell and the price level rose. |
|d. |real output and the price level both fell. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Price level MSC: Applicative

Table 23-4

The table below contains data for the country of Dachsland, which produces only pretzels and books. The base year is 2005.

|Year |Price |Quantity of |Price of |Quantity of |
| |of Pretzels |Pretzels |Books |Books |
|2005 |$4.00 |90 |$1.50 |150 |
|2006 |$4.00 |100 |$2.00 |180 |
|2007 |$5.00 |120 |$2.50 |200 |
|2008 |$6.00 |150 |$3.50 |200 |

37. Refer to Table 23-4. In 2005, Dachsland’s
|a. |nominal GDP was greater than real GDP, and the GDP deflator was greater than 100. |
|b. |nominal GDP was equal to real GDP, and the GDP deflator was equal to 1. |
|c. |nominal GDP was less than real GDP, and the GDP deflator was less than 100. |
|d. |nominal GDP was equal to real GDP, and the GDP deflator was equal to 100. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

38. Refer to Table 23-4. In 2006, Dachsland’s
|a. |nominal GDP was $585, real GDP was $660, and the GDP deflator was 88.6. |
|b. |nominal GDP was $585, real GDP was $670, and the GDP deflator was 87.3. |
|c. |nominal GDP was $760, real GDP was $660, and the GDP deflator was 115.2. |
|d. |nominal GDP was $760, real GDP was $670, and the GDP deflator was 113.4. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

39. Refer to Table 23-4. In 2007, Dachsland’s
|a. |nominal GDP was $585, real GDP was $780, and the GDP deflator was 75. |
|b. |nominal GDP was $585, real GDP was $825, and the GDP deflator was 70.9. |
|c. |nominal GDP was $1100, real GDP was $780, and the GDP deflator was 141.0. |
|d. |nominal GDP was $1100, real GDP was $825, and the GDP deflator was 133.3. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

40. Refer to Table 23-4. In 2008, Dachsland’s
|a. |nominal GDP was $585, real GDP was $900, and the GDP deflator was 65. |
|b. |nominal GDP was $585, real GDP was $1065, and the GDP deflator was 54.9. |
|c. |nominal GDP was $1600, real GDP was $900, and the GDP deflator was 177.8. |
|d. |nominal GDP was $1600, real GDP was $1065, and the GDP deflator was 150.2. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP | Real GDP | GDP deflator MSC: Applicative

41. Refer to Table 23-4. Dachsland’s real GDP was
|a. |$585 in 2006, $585 in 2007, and $585 in 2008. |
|b. |$660 in 2006, $825 in 2007, and $1065 in 2008. |
|c. |$670 in 2006, $780 in 2007, and $900 in 2008. |
|d. |$760 in 2006, $1100 in 2007, and $1600 in 2008. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

42. Refer to Table 23-4. Dachsland’s output grew
|a. |29.9% from 2005 to 2006. |
|b. |33.3% from 2006 to 2007. |
|c. |24.3% from 2006 to 2007. |
|d. |15.4% from 2007 to 2008. |

ANS: D DIF: 3 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Analytical

43. Refer to Table 23-4. Dachsland’s inflation rate from 2006 to 2007 was
|a. |16.4%. |
|b. |24.3%. |
|c. |41.0%. |
|d. |44.7%. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

44. Refer to Table 23-4. Dachsland’s inflation rate from 2007 to 2008 was
|a. |15.4%. |
|b. |26.1%. |
|c. |45.5%. |
|d. |77.8%. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

Table 23-5

The table below contains data for the country of Batterland, which produces only waffles and pancakes. The base year is 2006.

|Year |Price |Quantity of |Price |Quantity of |
| |of Waffles |Waffles |of Pancakes |Pancakes |
|2005 |$2 |100 |$1 |100 |
|2006 |$2 |120 |$2 |150 |
|2007 |$3 |150 |$3 |200 |
|2008 |$4 |180 |$3 |220 |

45. Refer to Table 23-5. In 2005, Batterland’s nominal GDP was
|a. |$300. |
|b. |$390. |
|c. |$400. |
|d. |$540. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Applicative

46. Refer to Table 23-5. In 2006, Batterland’s nominal GDP was
|a. |$100. |
|b. |$390. |
|c. |$400. |
|d. |$540. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal GDP MSC: Applicative

47. Refer to Table 23-5. In 2005, Batterland’s real GDP was
|a. |$300. |
|b. |$390. |
|c. |$400. |
|d. |$540. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

48. Refer to Table 23-5. In 2006, Batterland’s real GDP was
|a. |$100. |
|b. |$390. |
|c. |$400. |
|d. |$540. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

49. Refer to Table 23-5. In 2007, Batterland’s real GDP was
|a. |$540. |
|b. |$700. |
|c. |$810. |
|d. |$1050. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

50. Refer to Table 23-5. In 2008, Batterland’s real GDP was
|a. |$540. |
|b. |$800. |
|c. |$930. |
|d. |$1380. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Applicative

51. Refer to Table 23-5. In 2005, Batterland’s GDP deflator was
|a. |75. |
|b. |100. |
|c. |133.3. |
|d. |This cannot be calculated from the information given. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

52. Refer to Table 23-5. In 2006, Batterland’s GDP deflator was
|a. |1. |
|b. |100. |
|c. |138.5. |
|d. |540. |

ANS: B DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

53. Refer to Table 23-5. In 2007, Batterland’s GDP deflator was
|a. |66.7. |
|b. |100. |
|c. |129.6. |
|d. |150. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

54. Refer to Table 23-5. In 2008, Batterland’s GDP deflator was
|a. |58.0. |
|b. |100. |
|c. |148.1. |
|d. |172.5. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Applicative

55. Refer to Table 23-5. From 2007 to 2008, Batterland’s output grew
|a. |14.3%. |
|b. |31.4%. |
|c. |48.1%. |
|d. |155.6%. |

ANS: A DIF: 3 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Analytical

56. Refer to Table 23-5. Batterland’s inflation rate from 2005 to 2006 was
|a. |-25%. |
|b. |25%. |
|c. |33.3%. |
|d. |100%. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

57. Refer to Table 23-5. Batterland’s inflation rate from 2007 to 2008 was
|a. |15%. |
|b. |22.5%. |
|c. |33.3%. |
|d. |72.5%. |

ANS: A DIF: 2 REF: 23-4
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

Table 23-6

The table below contains data for the country of Togogo. The base year is 1974.

|Year |Nominal GDP |GDP Deflator |
|1974 |$2000 |100 |
|1975 |$3000 |120 |
|1976 |$3750 |150 |
|1977 |$6000 |200 |

58. Refer to Table 23-6. Which of the following is not correct?
|a. |This economy experienced growth from 1974 to 1975. |
|b. |This economy experienced growth from 1975 to 1976. |
|c. |This economy experienced growth from 1976 to 1977. |
|d. |This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from 1976 to 1977. |

ANS: B DIF: 3 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Inflation MSC: Analytical

59. Refer to Table 23-6. From 1975 to 1976,
|a. |inflation was 25% and output did not grow. |
|b. |inflation was 25% and output grew. |
|c. |inflation was 50% and output did not grow. |
|d. |inflation was 50% and output grew. |

ANS: A DIF: 3 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Inflation rate MSC: Analytical

60. Refer to Table 23-6. From 1976 to 1977,
|a. |inflation was 33.3% and output grew at a rate of 20%. |
|b. |inflation was 33.3% and output grew at a rate of 60%. |
|c. |inflation was 50% and output grew at a rate of 20%. |
|d. |inflation was 50% and output grew at a rate of 60%. |

ANS: A DIF: 3 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP | Inflation rate MSC: Analytical

61. Which of the following is not a correct statement about the growth of real GDP in the U.S. economy?
|a. |Real GDP in 2004 was almost four times its 1965 level. |
|b. |Growth was steady between 1965 and 2004. |
|c. |Continued growth in real GDP enables the typical American to enjoy greater economic prosperity than his or her parents |
| |and grandparents did. |
|d. |The output of goods and services produced grew on average about 3.2 percent per year between 1965 and 2004. |

ANS: B DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP MSC: Definitional

62. A recession has traditionally been defined as a period during which
|a. |nominal GDP declines for two consecutive quarters. |
|b. |nominal GDP declines for four consecutive quarters. |
|c. |real GDP declines for two consecutive quarters. |
|d. |real GDP declines for four consecutive quarters. |

ANS: C DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Recession MSC: Interpretive

63. Recessions are not associated with which of the following?
|a. |increased bankruptcies |
|b. |falling profits |
|c. |falling incomes |
|d. |falling unemployment |

ANS: D DIF: 1 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Recession MSC: Definitional

64. A recession is always associated with
|a. |the end of a war. |
|b. |slowly growing real GDP. |
|c. |rising inflation. |
|d. |declining real GDP. |

ANS: D DIF: 2 REF: 23-4
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Recession MSC: Interpretive

Sec05 - Measuring a Nation's Income - Is GDP a Good Measure of Economic Well-Being?

MULTIPLE CHOICE

1. GDP per person tells us the income and expenditure of the
|a. |richest person in the economy. |
|b. |poorest person in the economy. |
|c. |average person in the economy. |
|d. |entire economy. |

ANS: C DIF: 1 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP per person MSC: Definitional

2. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society is
|a. |saving per person. |
|b. |GDP per person. |
|c. |government expenditures per person. |
|d. |investment per business firm. |

ANS: B DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP per person MSC: Interpretive

3. Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that
|a. |GDP is not a useful measure of society's welfare. |
|b. |GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of |
| |government. |
|c. |GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that |
| |can be used to help produce the things that contribute to welfare. |
|d. |GDP is still the best measure of society's welfare because these other values cannot actually be measured. |

ANS: C DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic welfare MSC: Interpretive

4. GDP does not reflect
|a. |the value of leisure. |
|b. |the value of goods and services produced at home. |
|c. |the quality of the environment. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Interpretive

5. GDP is not a perfect measure of well-being; for example,
|a. |GDP incorporates a large number of non-market goods and services that are of little value to society. |
|b. |GDP places too much emphasis on the value of leisure. |
|c. |GDP fails to account for the quality of the environment. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic welfare MSC: Interpretive

6. GDP is not a perfect measure of well-being; for example,
|a. |GDP excludes the value of volunteer work. |
|b. |GDP does not address the distribution of income. |
|c. |GDP does not address environmental quality. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic welfare MSC: Interpretive

7. Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct?
|a. |GDP would definitely increase, despite the fact that GDP includes leisure. |
|b. |GDP would definitely increase because GDP excludes leisure. |
|c. |GDP could either increase or decrease because GDP includes leisure. |
|d. |GDP could either increase or decrease because GDP excludes leisure. |

ANS: B DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

8. Suppose the government eliminates all environmental regulations and, as a result, the production of goods and services increases, but there is considerably more pollution. Based on this scenario, which of the following statements is correct?
|a. |GDP would definitely increase, despite the fact that GDP includes environmental quality. |
|b. |GDP would definitely decrease because GDP includes environmental quality. |
|c. |GDP would definitely increase because GDP excludes environmental quality. |
|d. |GDP could either increase or decrease because GDP excludes environmental quality. |

ANS: C DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP MSC: Applicative

9. Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person?
|a. |It more than doubled. |
|b. |It increased, but it less than doubled. |
|c. |It was unchanged. |
|d. |It decreased. |

ANS: C DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP per person MSC: Applicative

10. During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person
|a. |grew by more than 12 percent. |
|b. |grew, but by less than 12 percent. |
|c. |was unchanged. |
|d. |decreased. |

ANS: B DIF: 3 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP per person MSC: Analytical

11. Suppose that over the last twenty-five years a country's nominal GDP grew to three times its former size. In the meantime, population grew by 40 percent and prices rose by 100 percent. What happened to real GDP per person?
|a. |It more than doubled. |
|b. |It increased, but it less than doubled. |
|c. |It was unchanged. |
|d. |It decreased. |

ANS: B DIF: 3 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real GDP per person MSC: Analytical

12. The information below was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest?

|Country |Nominal GDP in 2000 |Population in 2000 |
|Japan |$4,800,000 million |127 million |
|Switzerland |$240,000 million |7.2 million |
|United States |$9,800,000 million |280 million |

|a. |Japan, Switzerland, United States |
|b. |Japan, United States, Switzerland |
|c. |Switzerland, United States, Japan |
|d. |United States, Japan, Switzerland |

ANS: B DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP per person MSC: Applicative

13. The information below was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest?

|Country |Nominal GDP in 2000 |Population in 2000 |
|Kenya |$10,400 million |30.1 million |
|Tanzania |$9,000 million |33.7 million |
|Zimbabwe |$7,200 million |12.6 million |

|a. |Kenya, Tanzania, Zimbabwe |
|b. |Tanzania, Kenya, Zimbabwe |
|c. |Zimbabwe, Kenya, Tanzania |
|d. |Zimbabwe, Tanzania, Kenya |

ANS: C DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP per person MSC: Applicative

14. International data on GDP and socioeconomic variables
|a. |are inconclusive about the relationship between GDP and the economic well-being of citizens. |
|b. |suggest that poor nations actually might enjoy a higher standard of living than do rich nations. |
|c. |leave no doubt that a nation's GDP is closely associated with its citizens' standard of living. |
|d. |indicate that there are few real differences in living standards around the world, in spite of the large differences in |
| |GDP between nations. |

ANS: C DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic welfare MSC: Interpretive

15. International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with
|a. |longer life expectancy and a lower percentage of the population that is literate. |
|b. |longer life expectancy and a higher percentage of the population that is literate. |
|c. |very nearly the same life expectancy and a lower percentage of the population that is literate. |
|d. |very nearly the same life expectancy and a higher percentage of the population that is literate. |

ANS: B DIF: 2 REF: 23-5
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Economic welfare MSC: Interpretive

Chapter 24
Measuring the Cost of Living

TRUE/FALSE

1. The consumer price index is used to monitor changes in an economy’s production of goods and services over time.
ANS: F DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

2. When the consumer price index falls, the typical family has to spend fewer dollars to maintain the same standard of living.
ANS: T DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

3. Economists use the term inflation to describe a situation in which the economy’s overall price level is rising.
ANS: T DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

4. The inflation rate is the absolute change in the price level from the previous period.
ANS: F DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Definitional

5. Inflation can be measured using either the GDP deflator or the consumer price index.
ANS: T DIF: 2 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Inflation | CPI | GDP deflator MSC: Interpretive

6. The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index.
ANS: F DIF: 2 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Inflation rate | CPI | GDP deflator MSC: Interpretive

7. Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does, it is the more common gauge of inflation.
ANS: T DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Inflation | CPI | GDP deflator MSC: Definitional

8. The CPI is a measure of the overall cost of the goods and services bought by a typical consumer.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

9. Each week, the Bureau of Labor Statistics computes and reports the consumer price index.
ANS: F DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

10. The Bureau of Labor Statistics is part of the U.S. Department of Labor.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics MSC: Definitional

11. The Bureau of Labor Statistics determines which prices are most important to the typical consumer by surveying consumers.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics MSC: Definitional

12. The content of the basket of goods and services used to compute the CPI changes every month.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

13. By keeping the basket of goods and services the same when computing the CPI, the Bureau of Labor Statistics isolates the effects of price changes from the effect of any quantity changes that might be occurring at the same time.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

14. When the consumer price index is computed, the base year is always the first year among the years being considered.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

15. The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008 by the price of the basket of goods and services in the base year, then multiplying by 100.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

16. The CPI is always 1 in the base year.
ANS: F DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

17. If the current year CPI is 140, then the price level has increased 40 percent since the base year.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

18. If the current year CPI is 90, then the price level has decreased 10 percent since the base year.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

19. The inflation rate for 2007 is computed by dividing (the CPI in 2007 minus the CPI in 2006) by the CPI in 2006, then multiplying by 100.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Interpretive

20. If the value of the consumer price index is 110 in 2005 and 121 in 2006, then the inflation rate is 11 percent for 2006.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

21. The producer price index measures the cost of a basket of goods and services bought by firms rather than consumers.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: PPI MSC: Definitional

22. Changes in the consumer price index are useful in predicting changes in the producer price index.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | PPI MSC: Interpretive

23. Data from the Bureau of Labor Statistics show that the largest category of consumer spending is housing.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

24. Data from the Bureau of Labor Statistics show that consumer spending on transportation is only slightly higher than consumer spending on food and beverages.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

25. Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on recreation and consumer spending on education and communication.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

26. Data from the Bureau of Labor Statistics show that apparel makes up 14 percent of the typical consumer’s budget.
ANS: F DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

27. The goal of the consumer price index is to gauge how much incomes must rise to maintain a constant standard of living.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

28. Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Interpretive

29. Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.
ANS: F DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Definitional

30. When a new good is introduced, consumers have more variety from which to choose, and this in turn increases the cost of maintaining the same level of economic well-being.
ANS: F DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Introduction of new goods MSC: Definitional

31. The CPI does not reflect the increase in the value of the dollar that arises from the introduction of new goods.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Introduction of new goods MSC: Definitional

32. If the quality of a good deteriorates from one year to the next while its price remains the same, then the value of a dollar falls.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Definitional

33. The Bureau of Labor Statistics does not try to account for quality changes in the goods and services in the basket used to compute the CPI.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Interpretive

34. There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

35. Many economists believe the bias in the CPI is now only about half as large as it once was.
ANS: T DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

36. The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

37. When the price of Italian wine rises, this change is reflected in the U.S. CPI but not in the U.S. GDP deflator.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

38. When the price of nuclear missiles rises, this change is reflected in the CPI but not in the GDP deflator.
ANS: F DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

39. In the U.S., when the price of oil rises, the CPI rises by much more than does the GDP deflator.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

40. The group of goods and services used to compute the GDP deflator changes automatically over time, but the group of goods and services used to compute the CPI does not.
ANS: T DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

41. The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different times.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Definitional

42. A dollar figure from 1908 is converted into 2008 dollars by dividing the 2008 price level by the 1908 price level, then multiplying by the 1908 dollar figure.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Interpretive

43. If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years ago would cost $1.50 in today's prices.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

44. Henry Ford paid his workers $5 a day in 1914, when the CPI was 10. Today, with the price index at 177, the $5 a day is worth $88.50.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

45. If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years, then you need to be making $43,333.33 in five years to have kept pace with consumer price inflation.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

46. When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Definitional

47. A COLA automatically raises the wage when the CPI rises.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: COLA MSC: Definitional

48. The U.S. income tax system is completely indexed for inflation.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Interpretive

49. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Bob’s purchasing power has increased by 3 percent.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

50. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 5 percent during the year the money was deposited, then Bob’s purchasing power has not changed.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

51. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Bob’s purchasing power has increased by 2 percent.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

52. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited, then Bob’s purchasing power has not changed.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

53. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 7 percent during the year the money was deposited, then Bob’s purchasing power has increased by 12 percent.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

54. The real interest rate measures the change in dollar amounts.
ANS: F DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate MSC: Definitional

55. The real interest rate is the interest rate corrected for inflation.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Definitional

56. The nominal interest rate tells you how fast the number of dollars in your bank account rises over time.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate MSC: Definitional

57. The real interest rate tells you how fast the purchasing power of your bank account rises over time.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Definitional

58. If the nominal interest rates rises, then the inflation rate must have increased.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Inflation rate MSC: Interpretive

59. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

60. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation rate is 3 percent.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

61. If the real interest rate is 5 percent and the inflation rate is 2 percent, then the nominal interest rate is 7 percent.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate MSC: Applicative

62. The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840. The purchasing power of Nathan’s account increased by 2 percent during the year. We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.
ANS: F DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Analytical

63. The U.S. economy has experienced rising consumer prices in every year since 1965.
ANS: T DIF: 1 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: U.S. inflation
MSC: Definitional

64. The U.S. economy has never experienced deflation.
ANS: F DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: U.S. inflation
MSC: Interpretive

65. In the late 1970s, U.S. nominal interest rates were high and real interest rates were low, but in the late 1990s, U.S. nominal interest rates were low and real interest rates were high.
ANS: T DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: U.S. interest rates MSC: Interpretive

SHORT ANSWER

1. In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing.

| |Food |Clothing |
|2002 price per unit |$4 |$10 |
|2003 price per unit |$6 |$20 |

|a. |What are the percentage increases in the price of food and in the price of clothing? |
|b. |What is the percentage increase in the CPI? |
|c. |Do these price changes affect all consumers to the same extent? Explain. |

ANS:
|a. |The price of food increased by 50 percent ([6-4]/4 x 100). The price of clothing increased by 100 percent ([20-10]/10 x |
| |100). |
|b. |In 2002, the market basket cost $300 (4x50 + 10x10); in 2003, it cost $500 (6x50 + 20x10). The percentage increase in the |
| |CPI is 66.7 percent ([500-300]/300 x 100). |
|c. |Because the price of clothing increased relatively more than the price of food, people who purchase a lot of clothing and |
| |little food became worse off relative to people who purchase a lot of food and little clothing. |

DIF: 2 REF: 24-1 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: CPI
MSC: Applicative

2. Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain.
ANS:
The 2 percent increase in the price of food will increase the CPI by more because the portion of the market basket consisting of food is much larger than the portion consisting of diamond rings.

DIF: 2 REF: 24-1 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: CPI
MSC: Interpretive

3. List the three major problems in using the CPI as a measure of the cost of living.
ANS:
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive. (2) Introduction of new goods. Because the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced. (3) Unmeasured quality change. Not all quality changes can be measured.

DIF: 2 REF: 24-1 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: CPI
MSC: Interpretive

4. Why does the GDP deflator give a different rate of inflation than the CPI?
ANS:
The GDP deflator and the CPI differ in two important ways. The GDP deflator uses as a basket all final goods and services produced in the domestic economy, while the CPI basket includes goods and services purchased by typical consumers. Therefore, changes in the price of imported goods affect the CPI, but not the GDP deflator. Also, changes in the price of domestically produced capital goods affect the GDP deflator, but not the CPI. Changes in the price of domestically produced consumer goods are likely to affect the CPI more than the GDP deflator because it is likely that those goods make up a larger part of consumer budgets than of GDP.

DIF: 2 REF: 24-1 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator
MSC: Interpretive

5. Compute how much each of the following items is worth in terms of today's dollars using 177 as the price index for today.
|a. |In 1926, the CPI was 17.7 and the price of a movie ticket was $0.25. |
|b. |In 1932, the CPI was 13.1 and a cook earned $15.00 a week. |
|c. |In 1943, the CPI was 17.4 and a gallon of gas cost $0.19. |

ANS:
|a. |The movie ticket is worth $.25 [pic] 177/17.7 = $2.50 in today's dollars. |
|b. |The cook’s weekly wage is worth $15.00 [pic] 177/13.1 = $202.67 in today's dollars. |
|c. |The gallon of gas is worth $.19 [pic] 177/17.4 = $1.93 in today's dollars. |

DIF: 2 REF: 24-2 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: Comparing dollar figures
MSC: Applicative

6. Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan.
|a. |What was the expected real interest rate? |
|b. |What was the actual real interest rate? |
|c. |Who benefited and who lost because of the unexpected inflation? |

ANS:
|a. |The expected real interest rate was 4 percent (6-2). |
|b. |The actual real interest rate was 1 percent (6-5). |
|c. |George, the banker, lost because he received less real interest income than he expected. Jay and Joyce gained because they |
| |paid less real interest income than they expected. |

DIF: 2 REF: 24-2 NAT: Analytic
LOC: The study of economics and definitions of economics TOP: Real interest rate
MSC: Applicative

Sec00 - Measuring the Cost of Living

MULTIPLE CHOICE

1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 300 times as much as Babe Ruth earned in 1931. However, prices have also risen since 1931. We can conclude that
|a. |the best baseball players today are about 300 times better off than Babe Ruth was in 1931. |
|b. |because prices have also risen, the standard of living of baseball stars hasn't changed since 1931. |
|c. |one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. |
|d. |one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without |
| |additional information regarding increases in prices since 1931. |

ANS: D DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Prices | Standard of living MSC: Interpretive

2. The consumer price index is used to
|a. |monitor changes in the level of wholesale prices in the economy. |
|b. |monitor changes in the cost of living over time. |
|c. |monitor changes in the level of real GDP over time. |
|d. |monitor changes in the stock market. |

ANS: B DIF: 1 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

3. The consumer price index is used to
|a. |convert nominal GDP into real GDP. |
|b. |turn dollar figures into meaningful measures of purchasing power. |
|c. |characterize the types of goods and services that consumers purchase. |
|d. |measure the quantity of goods and services that the economy produces. |

ANS: B DIF: 1 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

4. Which of the following is not correct?
|a. |The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power. |
|b. |The consumer price index is used to monitor changes in the cost of living over time. |
|c. |The consumer price index is used by economists to measure the inflation rate. |
|d. |The consumer price index is used to measure the quantity of goods and services that the economy is producing. |

ANS: D DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

5. When the consumer price index rises, the typical family
|a. |has to spend more dollars to maintain the same standard of living. |
|b. |can spend fewer dollars to maintain the same standard of living. |
|c. |finds that its standard of living is not affected. |
|d. |can offset the effects of rising prices by saving more. |

ANS: A DIF: 1 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Standard of living MSC: Definitional

6. When the consumer price index falls, the typical family
|a. |has to spend more dollars to maintain the same standard of living. |
|b. |can spend fewer dollars to maintain the same standard of living. |
|c. |finds that its standard of living is not affected. |
|d. |can save less because they do not need to offset the effects of rising prices. |

ANS: B DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Standard of living MSC: Interpretive

7. Economists use the term inflation to describe a situation in which
|a. |some prices are rising faster than others. |
|b. |the economy's overall price level is rising. |
|c. |the economy's overall price level is high, but not necessarily rising. |
|d. |the economy's overall output of goods and services is rising faster than the economy's overall price level. |

ANS: B DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

8. The term inflation is used to describe a situation in which
|a. |the overall level of prices in the economy is increasing. |
|b. |incomes in the economy are increasing. |
|c. |stock-market prices are rising. |
|d. |the economy is growing rapidly. |

ANS: A DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

9. When the overall level of prices in the economy is increasing, economists say that the economy is experiencing
|a. |economic growth. |
|b. |stagflation. |
|c. |inflation. |
|d. |deflation. |

ANS: C DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

10. The inflation rate is defined as the
|a. |price level in an economy. |
|b. |change in the price level from one period to the next. |
|c. |percentage change in the price level from the previous period. |
|d. |price level minus the price level from the previous period. |

ANS: C DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Definitional

11. The economy's inflation rate is the
|a. |price level in the current period. |
|b. |change in the price level from the previous period. |
|c. |change in the gross domestic product from the previous period. |
|d. |percentage change in the price level from the previous period. |

ANS: D DIF: 1 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Definitional

12. The inflation rate you are likely to hear on the nightly news is calculated from
|a. |the GDP deflator. |
|b. |the CPI. |
|c. |the Dow Jones Industrial Average. |
|d. |the unemployment rate. |

ANS: B DIF: 2 REF: 24-0
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Interpretive

13. Which of the following is correct?
|a. |The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers. |
|b. |The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers. |
|c. |The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers. |
|d. |The GDP deflator is more commonly used as a gauge of inflation than the CPI is. |

ANS: B DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

14. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because
|a. |the CPI is easier to measure. |
|b. |the CPI is calculated more often than the GDP deflator is. |
|c. |the CPI better reflects the goods and services bought by consumers. |
|d. |the GDP deflator cannot be used to gauge inflation. |

ANS: C DIF: 2 REF: 24-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

Sec01 - Measuring the Cost of Living - The Consumer Price Index

MULTIPLE CHOICE

1. The CPI is a measure of the overall cost of
|a. |the inputs purchased by a typical producer. |
|b. |the goods and services purchased by a typical consumer. |
|c. |the goods and services produced in the economy. |
|d. |the stocks on the New York Stock Exchange. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

2. The CPI is a measure of the overall cost of the goods and services bought by
|a. |a typical firm. |
|b. |the government. |
|c. |a typical consumer. |
|d. |All of the above are correct. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

3. The CPI is a measure of the overall cost of the goods and services bought by
|a. |a typical consumer, and the CPI is computed and reported by the Department of the Treasury. |
|b. |typical consumers and typical business firms, and the CPI is computed and reported by the Department of the Treasury. |
|c. |a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics. |
|d. |typical consumers and typical business firms, and the CPI is computed and reported by the Bureau of Labor Statistics. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

4. Which of the following agencies calculates the CPI?
|a. |the National Price Board |
|b. |the Department Of Weight and Measurements |
|c. |the Bureau of Labor Statistics |
|d. |the Congressional Budget Office |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Bureau of Labor Statistics MSC: Definitional

5. Which entity within the U.S. government is responsible for computing and reporting the CPI?
|a. |the Department of Commerce |
|b. |the Department of Labor |
|c. |the General Accounting Office |
|d. |the Council of Economic Advisers |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Department of Labor MSC: Definitional

6. The CPI is calculated
|a. |monthly by the Department of Commerce. |
|b. |monthly by the Bureau of Labor Statistics. |
|c. |quarterly by the Department of Commerce. |
|d. |quarterly by the Bureau of Labor Statistics. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Bureau of Labor Statistics MSC: Definitional

7. The CPI is calculated
|a. |weekly. |
|b. |monthly. |
|c. |quarterly. |
|d. |yearly. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

8. The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:
|a. |Choose a base year, fix the basket, find the prices, compute the basket’s cost, compute the index, and compute the |
| |inflation rate. |
|b. |Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute |
| |the index. |
|c. |Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the |
| |inflation rate. |
|d. |Fix the basket, find the prices, compute the inflation rate, compute the basket’s cost, and choose a base year and |
| |compute the index. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Definitional

9. In the CPI, goods and services are weighted according to
|a. |how long a market has existed for each good or service. |
|b. |the extent to which each good or service is regarded by the government as a necessity. |
|c. |how much consumers buy of each good or service. |
|d. |the number of firms that produce and sell each good or service. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

10. In the calculation of the CPI, coffee is given greater weight than tea if
|a. |consumers buy more coffee than tea. |
|b. |the price of coffee is higher than the price of tea. |
|c. |it costs more to produce coffee than it costs to produce tea. |
|d. |coffee is more readily available than tea is to the typical consumer. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

11. In the calculation of the CPI, sweaters are given greater weight than jeans if
|a. |the price of sweaters is higher than the price of jeans. |
|b. |it costs more to produce sweaters than it costs to produce jeans. |
|c. |sweaters are more readily available than jeans are to the typical consumer. |
|d. |consumers buy more sweaters than jeans. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

12. In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by
|a. |surveying consumers. |
|b. |surveying sellers of the goods and services. |
|c. |working backward from the rate of inflation to arrive at imputed values for those quantities. |
|d. |arbitrary choices made by federal government employees. |

ANS: A DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

13. What basket of goods and services is used to construct the CPI?
|a. |a random sample of all goods and services produced in the economy |
|b. |the goods and services that are typically bought by consumers as determined by government surveys |
|c. |only food, clothing, transportation, entertainment, and education |
|d. |the least expensive and the most expensive goods and services in each major category of consumer expenditures |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

14. Consider a small economy in which consumers buy only two goods: apples and pears. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that
|a. |the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer in |
| |each year. |
|b. |neither the number of apples nor the number of pears bought by the typical consumer changes from year to year. |
|c. |the percentage change in the price of apples is equal to the percentage change in the price of pears from year to year. |
|d. |neither the price of apples nor the price of pears changes from year to year. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

15. Consider a small economy in which consumers buy only two goods: pies and tarts. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that
|a. |the percentage change in the price of pies is equal to the percentage change in the price of tarts from year to year. |
|b. |the number of pies bought by the typical consumer is equal to the number of tarts bought by the typical consumer in each|
| |year. |
|c. |neither the number of pies nor the number of tarts bought by the typical consumer changes from year to year. |
|d. |neither the price of pies nor the price of tarts changes from year to year. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

16. To calculate the CPI, the Bureau of Labor Statistics uses
|a. |the prices of all goods and services produced domestically. |
|b. |the prices of all final goods and services. |
|c. |the prices of all consumer goods. |
|d. |the prices of some consumer goods. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

17. When computing the cost of the basket of goods and services purchased by a typical consumer, which of the following changes from year to year?
|a. |the quantities of the goods and services purchased |
|b. |the prices of the goods and services |
|c. |the goods and services making up the basket |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

18. In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct?
|a. |The base year is always the first year among the years for which computations are being made. |
|b. |It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not |
| |necessary to designate a base year. |
|c. |The value of the consumer price index is always 100 in the base year. |
|d. |The base year is always the year in which the cost of the basket was highest among the years for which computations are |
| |being made. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

19. For any given year, the CPI is the price of the basket of goods and services in the
|a. |given year divided by the price of the basket in the base year, then multiplied by 100. |
|b. |given year divided by the price of the basket in the previous year, then multiplied by 100. |
|c. |base year divided by the price of the basket in the given year, then multiplied by 100. |
|d. |previous year divided by the price of the basket in the given year, then multiplied by 100. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

20. The inflation rate is calculated
|a. |by determining the change in the price index from the preceding period. |
|b. |by adding up the price increases of all goods and services. |
|c. |by computing a simple average of the price increases for all goods and services. |
|d. |by determining the percentage increase in the price index from the preceding period. |

ANS: D DIF: 1 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Definitional

21. The inflation rate is calculated
|a. |by determining the change in the price index from the preceding period. |
|b. |by determining the change in the price index from the base year. |
|c. |by determining the percentage change in the price index from the preceding period. |
|d. |by determining the percentage change in the price index from the base year. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Definitional

22. If 2004 is the base year, then the inflation rate for 2005 equals
|a. |[pic] |
|b. |[pic] |
|c. |[pic] |
|d. |[pic] |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Interpretive

23. If 2002 is the base year, then the inflation rate in 2005 equals
|a. |[pic] |
|b. |[pic] |
|c. |[pic] |
|d. |[pic] |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Interpretive

24. If the consumer price index was 80 in 2004, 100 in 2005, and 110 in 2006, then the base year must be
|a. |2004. |
|b. |2005. |
|c. |2006. |
|d. |The base year cannot be determined from the given information. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

25. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as the base year. In 2002, the basket’s cost was $75.00; in 2004, the basket’s cost was $79.50; and in 2006, the basket’s cost was $85.86. The value of the CPI was
|a. |100 in 2002. |
|b. |106 in 2004. |
|c. |114.48 in 2006. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

26. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2004 was
|a. |96.2. |
|b. |102.0. |
|c. |104.0. |
|d. |152.0. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

27. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2006 was
|a. |91.6. |
|b. |104.6. |
|c. |109.2. |
|d. |154.6. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

28. Suppose a basket of goods and services has been selected to calculate the CPI and 2004 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2006 was
|a. |91.6. |
|b. |95.2. |
|c. |105.0. |
|d. |109.2. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

29. If the consumer price index was 100 in the base year and 107 in the following year, then the inflation rate was
|a. |1.07 percent. |
|b. |7 percent. |
|c. |10.7 percent. |
|d. |107 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

30. The price index was 320 in one year and 360 in the next year. What was the inflation rate?
|a. |9 percent |
|b. |11.1 percent |
|c. |12.5 percent |
|d. |40 percent |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

31. The price index was 120 in 2006 and 127.2 in 2007. What was the inflation rate?
|a. |5.7 percent |
|b. |6.0 percent |
|c. |7.2 percent |
|d. |27.2 percent |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

32. For an imaginary economy, the value of the consumer price index was 140 in 2006 and 149.10 in 2007. The economy’s inflation rate for 2007 was
|a. |6.1 percent. |
|b. |6.5 percent. |
|c. |9.1 percent. |
|d. |49.1 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

33. From 2004 to 2005, the CPI for medical care increased from 260.8 to 272.8. What was the inflation rate for medical care?
|a. |4.4 percent |
|b. |4.6 percent |
|c. |12.0 percent |
|d. |172.8 percent |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

34. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?
|a. |4 percent |
|b. |11 percent |
|c. |19.6 percent |
|d. |24.4 percent |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

35. Between October 2001 and October 2002, the CPI in Canada rose from 116.5 to 119.8 and the CPI in Mexico rose from 93.2 to 102.3. What were the inflation rates for Canada and Mexico over this one-year period?
|a. |2.8 percent for Canada and 9.1 percent for Mexico |
|b. |2.8 percent for Canada and 9.8 percent for Mexico |
|c. |3.3 percent for Canada and 9.1 percent for Mexico |
|d. |3.3 percent for Canada and 9.8 percent for Mexico |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

36. Suppose the price index was 110 in 2004, 120 in 2005, and 125 in 2006. Which of the following statements is correct?
|a. |The economy experienced inflation between 2004 and 2005 and between 2005 and 2006. |
|b. |The inflation rate was positive between 2004 and 2005, and it was negative between 2005 and 2006. |
|c. |The inflation rate was higher between 2005 and 2006 than it was between 2004 and 2005. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

37. The price index was 150 in the first year, 160 in the second year, and 175 in the third year. The inflation rate was about
|a. |6.25 percent between the first and second years, and 8.6 percent between the second and third years. |
|b. |6.7 percent between the first and second years, and 9.4 percent between the second and third years. |
|c. |10 percent between the first and second years, and 15 percent between the second and third years. |
|d. |60 percent between the first and second years, and 75 percent between the second and third years. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

38. The price index was 110 in the first year, 100 in the second year, and 96 in the third year. The economy experienced
|a. |9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years. |
|b. |9.1 percent deflation between the first and second years, and 4.2 percent deflation between the second and third years. |
|c. |10 percent deflation between the first and second years, and 4 percent deflation between the second and third years. |
|d. |10 percent deflation between the first and second years, and 4.2 percent deflation between the second and third years. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

39. If the price index was 90 in year 1, 100 in year 2, and 95 in year 3, then the economy experienced
|a. |10 percent inflation between years 1 and 2 ,and 5 percent inflation between years 2 and 3. |
|b. |10 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3. |
|c. |11.1 percent inflation between years 1 and 2, and 5 percent inflation between years 2 and 3. |
|d. |11.1 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

40. The price index was 150 in the first year, 160 in the second year, and 165 in the third year. Which of the following statements is correct?
|a. |The price level was higher in the second year than in the first year, and it was higher in the third year than in the |
| |second year. |
|b. |The inflation rate was positive between the first and second years, and it was positive between the second and third |
| |years. |
|c. |The inflation rate was lower between the second and third years than it was between the first and second years. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Price level | Inflation rate
MSC: Applicative

41. In a particular economy, the price index was 270 in 2005 and 300 in 2006. Which of the following statements is correct?
|a. |The economy experienced a rising price level between 2005 and 2006. |
|b. |The economy experienced a higher inflation rate between 2005 and 2006 than it had experienced between 2004 and 2005. |
|c. |The inflation rate between 2005 and 2006 was 30 percent. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Price level | Inflation rate
MSC: Applicative

42. Which of the following changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 120, or 150 to 170?
|a. |80 to 100 |
|b. |100 to 120 |
|c. |150 to 170 |
|d. |All of these changes produce the same rate of inflation. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

43. Which of the following changes in the price index produces the greatest rate of inflation: 106 to 112, 112 to 118, or 118 to 124?
|a. |106 to 112 |
|b. |112 to 118 |
|c. |118 to 124 |
|d. |All of these changes produce the same rate of inflation. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

44. Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?
|a. |100 to 110 |
|b. |150 to 165 |
|c. |180 to 198 |
|d. |All of these changes produce the same rate of inflation. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

45. If the CPI was 110 this year and 100 last year, then
|a. |the cost of the CPI basket of goods and services increased by 110 percent this year. |
|b. |the price level increased by 10 percent this year. |
|c. |the inflation rate for this year was 10 percent higher than the inflation rate for last year. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Price level MSC: Applicative

46. If the CPI was 125 this year and 120 last year, then
|a. |the cost of the CPI basket of goods and services increased by 4.2 percent this year. |
|b. |the price level increased by 4.2 percent this year. |
|c. |the inflation rate for this year was 4.2 percent. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Price level | Inflation rate MSC: Applicative

47. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?
|a. |When 2006 is chosen as the base year, the consumer price index is 90 in 2007. |
|b. |When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007. |
|c. |When 2007 is chosen as the base year, the consumer price index is 100 in 2006. |
|d. |When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007. |

ANS: D DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Analytical

48. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007 was 125, then how much did a magazine cost in 2007?
|a. |$0.83 |
|b. |$2.25 |
|c. |$2.50 |
|d. |$3.00 |

ANS: C DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Analytical

49. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007?
|a. |$1.87 |
|b. |$2.08 |
|c. |$2.32 |
|d. |$3.00 |

ANS: B DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Analytical

50. In an imaginary economy, consumers buy only shirts and pants. The fixed basket consists of 6 shirts and 4 pairs of pants. A shirt cost $20 in 2006 and $25 in 2007. A pair of pants cost $30 in 2006 and $40 in 2007. Using 2006 as the base year, which of the following statements is correct?
|a. |For the typical consumer, the number of dollars spent on shirts is equal to the number of dollars spent on pants in each|
| |of the two years. |
|b. |The consumer price index is 310 in 2007. |
|c. |The rate of inflation is 29.17% in 2007. |
|d. |None of the above is correct. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

51. The price index was 128.96 in 2006, and the inflation rate was 24 percent between 2005 and 2006. The price index in 2005 was
|a. |104. |
|b. |104.96. |
|c. |152.96. |
|d. |159.91. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

52. The price index was 92 in 2000, and the inflation rate was 13 percent between 1999 and 2000. The price index in 1999 was
|a. |79. |
|b. |81.4. |
|c. |103.96. |
|d. |105. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

53. For an imaginary economy, the value of the consumer price index was 138.75 in 2007, and the inflation rate was 11 percent between 2006 and 2007. The consumer price index in 2006 was
|a. |125. |
|b. |127.75. |
|c. |149.75. |
|d. |154.01. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

54. For an imaginary economy, the value of the consumer price index was 125 in 2009, and the inflation rate was 4.8 percent between 2008 and 2009. The consumer price index in 2008 was
|a. |119.27. |
|b. |120.2. |
|c. |129.8. |
|d. |131. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

55. Suppose the price index was 100 in 2004, 118 in 2005, and the inflation rate was lower between 2005 and 2006 than it was between 2004 and 2005. This means that
|a. |the price index in 2006 was lower than 118. |
|b. |the price index in 2006 was lower than 136. |
|c. |the price index in 2006 was lower than 139.24. |
|d. |the inflation rate between 2005 and 2006 was lower than 1.18 percent. |

ANS: C DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Analytical

56. Suppose the price index was 105 in 2007, 115.5 in 2008, and the inflation rate was lower between 2008 and 2009 than it was between 2007 and 2008. This means that
|a. |the price index in 2009 was lower than 115.5. |
|b. |the price index in 2009 was lower than 126. |
|c. |the price index in 2009 was lower than 127.05. |
|d. |the inflation rate between 2008 and 2009 was lower than 1.1 percent. |

ANS: C DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Analytical

57. Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005. However, the inflation rate was lower between 2004 and 2005 than it was between 2003 and 2004. Which of the following scenarios is consistent with this assumption?
|a. |The CPI was 100 in 2003, 110 in 2004, and 105 in 2005. |
|b. |The CPI was 100 in 2003, 120 in 2004, and 135 in 2005. |
|c. |The CPI was 100 in 2003, 105 in 2004, and 130 in 2005. |
|d. |The CPI was 100 in 2003, 90 in 2004, and 88 in 2005. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

58. Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005. However, the inflation rate was higher between 2004 and 2005 than it was between 2003 and 2004. Which of the following scenarios is consistent with this assumption?
|a. |The CPI was 100 in 2003, 110 in 2004, and 105 in 2005. |
|b. |The CPI was 100 in 2003, 120 in 2004, and 135 in 2005. |
|c. |The CPI was 100 in 2003, 105 in 2004, and 130 in 2005. |
|d. |The CPI was 100 in 2003, 90 in 2004, and 88 in 2005. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Applicative

59. For an imaginary economy, the consumer price index was 62.50 in 2004, 100.00 in 2005, and 160.00 in 2006. Which of the following statements is correct?
|a. |If the basket of goods that is used to calculate the CPI cost $80 in 2004, then that basket of goods cost $128 in 2005. |
|b. |If the basket of goods that is used to calculate the CPI cost $90 in 2005, then that basket of goods cost $150 in 2006. |
|c. |The overall level of prices increased by 97.5 percent between 2004 and 2006. |
|d. |All of the above are correct. |

ANS: A DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Analytical

60. For an imaginary economy, the consumer price index was 115.00 in 2004, 126.50 in 2005, and 136.62 in 2006. Which of the following statements is correct?
|a. |For this economy, the base year must be 2004. |
|b. |If the basket of goods that is used to calculate the CPI cost $75.00 in the base year, then that basket of goods cost |
| |$115.00 in 2004. |
|c. |This economy’s rate of inflation for 2006 is 10.12 percent. |
|d. |None of the above is correct. |

ANS: D DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Analytical

61. Suppose a basket of goods and services has been selected to calculate the consumer price index. In 2005, the basket of goods cost $108.00; in 2006, it cost $135.00; and in 2007, it cost $168.75. Which of the following statements is correct?
|a. |Using 2005 as the base year, the economy’s inflation rate was higher in 2007 than it was in 2006. |
|b. |If 2007 is the base year, then the CPI is 33.75 in 2006. |
|c. |If the CPI is 156.25 in 2007, then 2005 is the base year. |
|d. |Using 2005 as the base year, the economy’s inflation rate for 2006 was 27 percent. |

ANS: C DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Inflation rate MSC: Analytical

Table 24-1

The table below pertains to Pieway, an economy in which the typical consumer’s basket consists of 10 bushels of peaches and 15 bushels of pecans.

|Year |Price of Peaches |Price of Pecans |
|2005 |$11 per bushel |$6 per bushel |
|2006 |$9 per bushel |$10 per bushel |

62. Refer to Table 24-1. The cost of the basket in 2005 was
|a. |$200. |
|b. |$210. |
|c. |$240. |
|d. |$245. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

63. Refer to Table 24-1. The cost of the basket in 2006 was
|a. |$200. |
|b. |$210. |
|c. |$240. |
|d. |$245. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

64. Refer to Table 24-1. If 2005 is the base year, then the CPI for 2005 was
|a. |83.3. |
|b. |100. |
|c. |120. |
|d. |200. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

65. Refer to Table 24-1. If 2005 is the base year, then the CPI for 2006 was
|a. |83.3. |
|b. |100. |
|c. |120. |
|d. |240. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

66. Refer to Table 24-1. If 2006 is the base year, then the CPI for 2005 was
|a. |83.3. |
|b. |100. |
|c. |120. |
|d. |200. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

67. Refer to Table 24-1. If 2006 is the base year, then the CPI for 2006 was
|a. |83.3. |
|b. |100. |
|c. |120. |
|d. |240. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

68. Refer to Table 24-1. If 2005 is the base year, then the inflation rate in 2006 was
|a. |16.7 percent. |
|b. |20 percent. |
|c. |40 percent. |
|d. |44.1 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

69. Refer to Table 24-1. If 2006 is the base year, then the inflation rate in 2006 was
|a. |16.7 percent. |
|b. |20 percent. |
|c. |40 percent. |
|d. |44.1 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

Table 24-2

The table below pertains to Iowan, an economy in which the typical consumer’s basket consists of 3 pounds of pork and 4 bushels of corn.

|Year |Price of |Price of |
| |Pork |Corn |
|2008 |$20 per pound | $12 per bushel |
|2009 |$25 per pound | $18 per bushel |

70. Refer to Table 24-2. The cost of the basket in 2008 was
|a. |$108. |
|b. |$147. |
|c. |$160. |
|d. |$224. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

71. Refer to Table 24-2. The cost of the basket in 2009 was
|a. |$108. |
|b. |$147. |
|c. |$160. |
|d. |$301. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

72. Refer to Table 24-2. If 2008 is the base year, then the CPI for 2008 was
|a. |73.5. |
|b. |100. |
|c. |108. |
|d. |136.1. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

73. Refer to Table 24-2. If 2008 is the base year, then the CPI for 2009 was
|a. |73.5. |
|b. |100. |
|c. |136.1. |
|d. |147. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

74. Refer to Table 24-2. If 2009 is the base year, then the CPI for 2008 was
|a. |73.5. |
|b. |100. |
|c. |108. |
|d. |136.1. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

75. Refer to Table 24-2. If 2009 is the base year, then the CPI for 2009 was
|a. |73.5. |
|b. |100. |
|c. |136.1. |
|d. |147. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

76. Refer to Table 24-2. If 2008 is the base year, then the inflation rate in 2009 was
|a. |26.5 percent. |
|b. |36.1 percent. |
|c. |39 percent. |
|d. |47 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

77. Refer to Table 24-2. If 2009 is the base year, then the inflation rate in 2009 was
|a. |26.5 percent. |
|b. |36.1 percent. |
|c. |39 percent. |
|d. |47 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

Table 24-3

The table below pertains to Studious, an economy in which the typical consumer’s basket consists of 5 books and 10 calculators.

|Year |Price of a Book |Price of a |
| | |Calculator |
|2006 |$24 |$8 |
|2007 |$30 |$12 |
|2008 |$32 |$15 |

78. Refer to Table 24-3. The cost of the basket in 2006 was
|a. |$32. |
|b. |$200. |
|c. |$280. |
|d. |$480. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

79. Refer to Table 24-3. The cost of the basket
|a. |increased from 2006 to 2007 and increased from 2007 to 2008. |
|b. |increased from 2006 to 2007 and decreased from 2007 to 2008. |
|c. |decreased from 2006 to 2007 and increased from 2007 to 2008. |
|d. |decreased from 2006 to 2007 and decreased from 2007 to 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

80. Refer to Table 24-3. The cost of the basket
|a. |increased by $10 from 2006 to 2007. |
|b. |increased by $42 from 2006 to 2007. |
|c. |increased by $70 from 2006 to 2007. |
|d. |increased by $150 from 2006 to 2007. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

81. Refer to Table 24-3. If 2006 is the base year, then the consumer price index was
|a. |100 in 2006, 135 in 2007, and 155 in 2008. |
|b. |100 in 2006, 270 in 2007, and 310 in 2008. |
|c. |200 in 2006, 135 in 2007, and 155 in 2008. |
|d. |200 in 2006, 270 in 2007, and 310 in 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

82. Refer to Table 24-3. If 2007 is the base year, then the consumer price index was
|a. |74.1 in 2006, 100 in 2007, and 114.8 in 2008. |
|b. |74.1 in 2006, 270 in 2007, and 310 in 2008. |
|c. |200 in 2006, 100 in 2007, and 114.8 in 2008. |
|d. |200 in 2006, 270 in 2007, and 310 in 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

83. Refer to Table 24-3. If 2008 is the base year, then the consumer price index was
|a. |64.5 in 2006, 87.1 in 2007, and 100 in 2008. |
|b. |64.5 in 2006, 270 in 2007, and 310 in 2008. |
|c. |200 in 2006, 87.1 in 2007, and 100 in 2008. |
|d. |200 in 2006, 270 in 2007, and 310 in 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

84. Refer to Table 24-3. The inflation rate was
|a. |22.6 percent in 2007 and 12.9 percent in 2008. |
|b. |25.9 percent in 2007 and 14.8 percent in 2008. |
|c. |35 percent in 2007 and 14.8 percent in 2008. |
|d. |35 percent in 2007 and 20 percent in 2008. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

Table 24-4

The table below pertains to Wrexington, an economy in which the typical consumer’s basket consists of 20 pounds of meat and 10 toys.

|Year |Price of |Price of a |
| |Meat |Toy |
|2004 |$3 per pound |$2 |
|2005 |$1 per pound |$7 |
|2006 |$4 per pound |$5 |

85. Refer to Table 24-4. The cost of the basket in 2006 was
|a. |$9. |
|b. |$130. |
|c. |$140. |
|d. |$270. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

86. Refer to Table 24-4. The cost of the basket
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

87. Refer to Table 24-4. The cost of the basket
|a. |decreased by $2 from 2004 to 2005. |
|b. |increased by $3 from 2004 to 2005. |
|c. |increased by $7 from 2004 to 2005. |
|d. |increased by $10 from 2004 to 2005. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

88. Refer to Table 24-4. If the base year is 2004, then the CPI in 2004 was
|a. |0. |
|b. |1. |
|c. |80. |
|d. |100. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

89. Refer to Table 24-4. If the base year is 2004, then the CPI in 2005 was
|a. |88.9. |
|b. |90. |
|c. |100. |
|d. |112.5. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

90. Refer to Table 24-4. If the base year is 2004, then the CPI
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

91. Refer to Table 24-4. If the base year is 2006, then the CPI
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

92. Refer to Table 24-4. If the base year is 2004, then the inflation rate in 2006 was
|a. |44.4%. |
|b. |50%. |
|c. |62.5%. |
|d. |80%. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

93. Refer to Table 24-4. If the base year is 2006, then the inflation rate in 2005 was
|a. |-44.5%. |
|b. |-30.8%. |
|c. |7.7%. |
|d. |12.5%. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

94. Refer to Table 24-4. The inflation rate was
|a. |negative in 2005 and negative in 2006. |
|b. |negative in 2005 and positive in 2006. |
|c. |positive in 2005 and negative in 2006. |
|d. |positive in 2005 and positive in 2006. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

Table 24-5

The table below pertains to Yackandsnack, an economy in which the typical consumer’s basket consists of 2 cell phones and 20 ham sandwiches.

|Year |Price of a |Price of a |
| |Cell Phone |Ham Sandwich |
|2006 |$50 |$3 |
|2007 |$60 |$4 |
|2008 |$55 |$5 |

95. Refer to Table 24-5. The cost of the basket
|a. |increased from 2006 to 2007 and increased from 2007 to 2008. |
|b. |increased from 2006 to 2007 and decreased from 2007 to 2008. |
|c. |decreased from 2006 to 2007 and increased from 2007 to 2008. |
|d. |decreased from 2006 to 2007 and decreased from 2007 to 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

96. Refer to Table 24-5. If the base year is 2006, then the consumer price index was
|a. |100 in 2006, 125 in 2007, and 131.25 in 2008. |
|b. |100 in 2006, 200 in 2007, and 210 in 2008. |
|c. |160 in 2006, 125 in 2007, and 131.25 in 2008. |
|d. |160 in 2006, 200 in 2007, and 210 in 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

97. Refer to Table 24-5. If the base year is 2007, then the consumer price index was
|a. |80 in 2006, 100 in 2007, and 105 in 2008. |
|b. |80 in 2006, 200 in 2007, and 210 in 2008. |
|c. |160 in 2006, 100 in 2007, and 105 in 2008. |
|d. |160 in 2006, 200 in 2007, and 210 in 2008. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

98. Refer to Table 24-5. If the base year is 2008, then the CPI
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Applicative

99. Refer to Table 24-5. If the base year is 2006, then the economy’s inflation rate in 2007 is
|a. |20 percent. |
|b. |25 percent. |
|c. |40 percent. |
|d. |125 percent. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

100. Refer to Table 24-5. If the base year is 2007, then the economy’s inflation rate in 2008 was
|a. |1.05 percent. |
|b. |4.8 percent. |
|c. |5 percent. |
|d. |10 percent. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

101. Which of the following is not an example of a price index computed by the Bureau of Labor Statistics?
|a. |the Los Angeles price index |
|b. |the energy price index |
|c. |the producer price index |
|d. |the stock price index |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics MSC: Interpretive

102. The producer price index measures the cost of a basket of goods and services
|a. |typically produced in the economy. |
|b. |produced for a typical consumer. |
|c. |sold by producers. |
|d. |bought by firms. |

ANS: D DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: PPI MSC: Definitional

103. The price index that measures the cost of a basket of goods and services bought by firms is called the
|a. |industrial price index. |
|b. |producer price index. |
|c. |core price index. |
|d. |GDP deflator. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: PPI MSC: Definitional

104. Changes in the producer price index are often thought to be useful in predicting changes in
|a. |stock prices. |
|b. |the consumer price index. |
|c. |the unemployment rate. |
|d. |the rate of output of goods and services. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: PPI | CPI MSC: Definitional

105. Suppose that in 2010, the producer price index increases by 2 percent. As a result, economists most likely will predict that
|a. |GDP will increase in 2011. |
|b. |the producer price index will increase by more than 2 percent in 2011. |
|c. |interest rates will decrease in the future. |
|d. |the consumer price index will increase in the future. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: PPI | CPI MSC: Interpretive

106. When constructing the consumer price index, the Bureau of Labor Statistics does not do which of the following?
|a. |Try to include all the goods and services that the typical consumer buys. |
|b. |Try to weight the goods and services that the typical consumer buys according to how much consumers buy of each item. |
|c. |Survey consumers to determine what the typical consumer buys. |
|d. |Survey sellers to determine what the typical consumer buys. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics MSC: Interpretive

107. By far the largest category of goods and services in the CPI basket is
|a. |housing. |
|b. |transportation. |
|c. |education & communication. |
|d. |food & beverages. |

ANS: A DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

108. For purposes of calculating the CPI, the housing category of consumer spending includes the cost of
|a. |shelter. |
|b. |fuel and other utilities. |
|c. |household furnishings and operation. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

109. For purposes of calculating the CPI, the transportation category of consumer spending includes the cost of
|a. |subways. |
|b. |gasoline. |
|c. |both subways and gasoline. |
|d. |neither subways nor gasoline. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

110. For purposes of calculating the CPI, the food & beverages category of consumer spending includes the cost of
|a. |food away from home. |
|b. |alcoholic beverages. |
|c. |both food away from home and alcoholic beverages. |
|d. |neither food away from home nor alcoholic beverages because these are included in the recreation category of consumer |
| |spending. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

111. For purposes of calculating the CPI, the apparel category of consumer spending includes the cost of
|a. |clothing, but not footwear or jewelry. |
|b. |clothing and footwear, but not jewelry. |
|c. |clothing and jewelry, but not footwear. |
|d. |clothing, footwear, and jewelry. |

ANS: D DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Definitional

112. In the basket of goods that is used to compute the consumer price index, the three largest categories of consumer spending are
|a. |housing, transportation, and recreation. |
|b. |housing, transportation, and food & beverages. |
|c. |housing, food & beverages, and education & communication. |
|d. |housing, medical care, and education & communication. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Interpretive

113. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the smallest?
|a. |food & beverages |
|b. |recreation |
|c. |housing |
|d. |apparel |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Interpretive

114. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the smallest?
|a. |education & communication |
|b. |apparel |
|c. |medical care |
|d. |recreation |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Interpretive

115. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the largest?
|a. |education & communication |
|b. |food & beverages |
|c. |medical care |
|d. |recreation |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Interpretive

116. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the largest?
|a. |education & communication |
|b. |recreation |
|c. |medical care |
|d. |All of the above categories are about equal in magnitude. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Interpretive

117. Categories of U.S. consumer spending, ranked from largest to smallest, are
|a. |housing, food & beverages, education & communication, and transportation. |
|b. |education & communication, housing, food & beverages, and transportation. |
|c. |food & beverages, housing, transportation, and medical care. |
|d. |housing, transportation, food & beverages, and medical care. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Interpretive

118. If the cost of housing increases by 10 percent, then, other things the same, the CPI is likely to increase by about
|a. |1.7 percent. |
|b. |3.3 percent. |
|c. |4.3 percent. |
|d. |10 percent. |

ANS: C DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Analytical

119. If the cost of transportation increases by 10 percent, then, other things the same, the CPI is likely to increase by about
|a. |0.6 percent. |
|b. |1.7 percent. |
|c. |3.3 percent. |
|d. |10 percent. |

ANS: B DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Analytical

120. If the cost of food & beverages increases by 20 percent, then, other things the same, the CPI is likely to increase by about
|a. |3 percent. |
|b. |15 percent. |
|c. |20 percent. |
|d. |30 percent. |

ANS: A DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Analytical

121. If the cost of medical care increases by 50 percent, then, other things the same, the CPI is likely to increase by about
|a. |3 percent. |
|b. |6 percent. |
|c. |12 percent. |
|d. |50 percent. |

ANS: A DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Analytical

122. If the cost of apparel increases by 50 percent, then, other things the same, the CPI is likely to increase by about
|a. |1 percent. |
|b. |2 percent. |
|c. |4 percent. |
|d. |8 percent. |

ANS: B DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Categories of consumer spending MSC: Analytical

123. The goal of the consumer price index is to measure changes in the
|a. |costs of production. |
|b. |cost of living. |
|c. |relative prices of consumer goods. |
|d. |production of consumer goods. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

124. The consumer price index tries to gauge how much incomes must rise to maintain
|a. |an increasing standard of living. |
|b. |a constant standard of living. |
|c. |a decreasing standard of living. |
|d. |the highest standard of living possible. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Standard of living MSC: Definitional

125. The consumer price index is
|a. |not very useful as a measure of the cost of living. |
|b. |a perfect measure of the cost of living. |
|c. |a useful measure, but not a perfect measure, of the cost of living. |
|d. |not used as a measure of the cost of living. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

126. Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living?
|a. |substitution bias |
|b. |introduction of new goods |
|c. |unmeasured quality change |
|d. |unmeasured price change |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

127. The three problems with using the consumer price index as a measure of the cost of living are
|a. |widely acknowledged and easy to solve. |
|b. |widely acknowledged and difficult to solve. |
|c. |nearly unacknowledged and easy to solve. |
|d. |nearly unacknowledged and difficult to solve. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Definitional

128. When the relative price of a good increases, consumers respond by buying
|a. |a larger quantity of that good and a larger quantity of substitutes for that good. |
|b. |a larger quantity of that good and a smaller quantity of substitutes for that good. |
|c. |a smaller quantity of that good and a larger quantity of substitutes for that good. |
|d. |a smaller quantity of that good and a smaller quantity of substitutes for that good. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Substitutes MSC: Interpretive

129. When the relative price of a good decreases, consumers respond by buying
|a. |a larger quantity of that good and a larger quantity of substitutes for that good. |
|b. |a larger quantity of that good and a smaller quantity of substitutes for that good. |
|c. |a smaller quantity of that good and a larger quantity of substitutes for that good. |
|d. |a smaller quantity of that good and a smaller quantity of substitutes for that good. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Substitutes MSC: Interpretive

130. Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, then people likely will buy
|a. |more milk and more T-shirts. |
|b. |more milk and fewer T-shirts. |
|c. |less milk and more T-shirts. |
|d. |less milk and fewer T-shirts. |

ANS: D DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Prices MSC: Analytical

131. Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50. If the CPI rises from 150 to 200, then people likely will buy
|a. |more ice cream and more coffee. |
|b. |more ice cream and less coffee. |
|c. |less ice cream and more coffee. |
|d. |less ice cream and less coffee. |

ANS: A DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Prices MSC: Analytical

132. Suppose the price of a tub of margarine rises from $3 to $3.75 and the price of a notebook rises from $1.25 to $1.75. If the CPI rises from 140 to 182, then people likely will buy
|a. |more margarine and more notebooks. |
|b. |more margarine and fewer notebooks. |
|c. |less margarine and more notebooks. |
|d. |less margarine and fewer notebooks. |

ANS: B DIF: 3 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Prices MSC: Analytical

133. One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called
|a. |price-change neglect. |
|b. |unmeasured quality change. |
|c. |substitution bias. |
|d. |relative bias. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Definitional

134. The substitution bias in the consumer price index refers to the
|a. |substitution by consumers toward new goods and away from old goods. |
|b. |substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality |
| |goods. |
|c. |substitution by consumers toward goods that have become relatively less expensive and away from goods that have become |
| |relatively more expensive. |
|d. |substitution of new prices for old prices in the CPI basket of goods and services from one year to the next. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Interpretive

135. Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this situation most relevant?
|a. |substitution bias |
|b. |introduction of new goods |
|c. |unmeasured quality change |
|d. |income bias |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Applicative

136. Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent, so she decides to buy some peppermint tea instead. To which problem in the construction of the CPI is this situation most relevant?
|a. |substitution bias |
|b. |introduction of new goods |
|c. |unmeasured quality change |
|d. |income effect |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Applicative

137. Assume that consumers consider coffee and tea to be substitutes, so that when the price of tea rises, consumers purchase less tea and more coffee. When the CPI is computed following the increase in the price of tea, it takes into account
|a. |the increase in the price of tea. |
|b. |the decrease in the quantity of tea purchased and the increase in the quantity of coffee purchased. |
|c. |both (a) and (b). |
|d. |None of the above is correct. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Applicative

138. By not taking into account the possibility of consumer substitution, the CPI
|a. |understates the cost of living. |
|b. |overstates the cost of living. |
|c. |may overstate or understate the cost of living, depending on how quickly prices rise. |
|d. |may overstate or understate the cost of living, regardless of how quickly prices rise. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Interpretive

139. Suppose the price of gasoline increases rapidly and consumers respond by buying a smaller quantity of gasoline. The consumer price index
|a. |reflects this price increase accurately. |
|b. |understates this price increase due to the substitution bias. |
|c. |overstates this price increase due to the income bias. |
|d. |overstates this price increase due to the substitution bias. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias MSC: Interpretive

140. When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth
|a. |more, and the cost of living increases. |
|b. |more, and the cost of living decreases. |
|c. |less, and the cost of living increases. |
|d. |less, and the cost of living decreases. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Introduction of new goods MSC: Interpretive

141. The introduction of a new good
|a. |increases the cost of maintaining the same level of economic well-being. |
|b. |decreases the cost of maintaining the same level of economic well-being. |
|c. |has no impact on the cost of maintaining the same level of economic well-being. |
|d. |may increase or decrease the cost of maintaining the same level of economic well-being, depending on how expensive the |
| |new good is. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Introduction of new goods MSC: Interpretive

142. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
|a. |fails to account for consumer spending on housing. |
|b. |accounts only for consumer spending on food, clothing, and energy. |
|c. |fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller |
| |percentages of their incomes on other goods. |
|d. |fails to account for the introduction of new goods. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Introduction of new goods MSC: Interpretive

143. Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because
|a. |new goods and services are always of higher quality than existing goods and services. |
|b. |new goods and services cost less than existing goods and services. |
|c. |new goods and services cost more than existing goods and services. |
|d. |when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain |
| |their standard of living. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Introduction of new goods MSC: Interpretive

144. To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?
|a. |substitution bias |
|b. |introduction of new goods |
|c. |unmeasured quality change |
|d. |income bias |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Introduction of new goods MSC: Applicative

145. To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?
|a. |substitution bias |
|b. |introduction of new goods |
|c. |unmeasured quality change |
|d. |income bias |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Introduction of new goods MSC: Applicative

146. If the quality of a good improves while its price remains the same, then the value of a dollar
|a. |rises and the cost of living increases. |
|b. |rises and the cost of living decreases. |
|c. |falls and the cost of living increases. |
|d. |falls and the cost of living decreases. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Quality change MSC: Interpretive

147. If the quality of a good deteriorates while its price remains the same, then the value of a dollar
|a. |rises and the cost of living increases. |
|b. |rises and the cost of living decreases. |
|c. |falls and the cost of living increases. |
|d. |falls and the cost of living decreases. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Quality change MSC: Interpretive

148. When the quality of a good improves while its price remains the same, the purchasing power of the dollar
|a. |increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. |
|b. |increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. |
|c. |decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. |
|d. |decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Interpretive

149. When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar
|a. |increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. |
|b. |increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. |
|c. |decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. |
|d. |decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Interpretive

150. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
|a. |fails to measure all changes in the quality of goods. |
|b. |displays a housing bias. |
|c. |accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Interpretive

151. Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers improves while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal,
|a. |the CPI will rise. |
|b. |the CPI will fall. |
|c. |the CPI will stay the same. |
|d. |lawn mowers will no longer be included in the market basket. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Applicative

152. For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant?
|a. |substitution bias |
|b. |introduction of new goods |
|c. |unmeasured quality change |
|d. |income bias |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Applicative

153. Laura bought word-processing software in 2005 for $50. Laura's twin brother, Laurence, bought an upgrade of the same software in 2006 for $50. To which problem in the construction of the CPI is this situation most relevant?
|a. |substitution bias |
|b. |unmeasured quality change |
|c. |introduction of new goods |
|d. |income bias |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Applicative

154. Which of the following is the most accurate statement about the effects of quality change on the CPI?
|a. |Even though the BLS adjusts the prices of products in the CPI basket when the quality of the products change, changes in|
| |quality are still a problem because quality is so hard to measure. |
|b. |Because the BLS adjusts the prices of products in the CPI basket when the quality of the products change, changes in |
| |quality are no longer a problem for the CPI. |
|c. |The BLS does not adjust the CPI for quality changes. |
|d. |Most economists believe that changes in the quality of goods included in the CPI basket do not bias the CPI as a measure|
| |of the cost of living. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Quality change MSC: Interpretive

155. Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?
|a. |substitution bias and introduction of new goods |
|b. |introduction of new goods and unmeasured quality change |
|c. |substitution bias and unmeasured quality change |
|d. |income bias and substitution bias |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias | Introduction of new goods MSC: Applicative

156. Which of these events would cause the consumer price index to overstate the increase in the cost of living?
|a. |Car makers benefit from a new technology that allows them to sell higher-quality cars to consumers with no increase in |
| |price. |
|b. |Energy prices decrease, and consumers respond by buying more gas and electricity. |
|c. |A new good is introduced that renders cellular telephones inferior and obsolete. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Substitution bias | Introduction of new goods | Quality change
MSC: Applicative

157. Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?
|a. |Economists agree that the bias in the CPI is a very serious problem. |
|b. |Economists agree that the bias in the CPI is not a serious problem. |
|c. |Economists agree on the severity of the CPI bias, but there is still debate on what to do about it. |
|d. |There is still debate among economists on the severity of the CPI bias and what to do about it. |

ANS: D DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | Economists MSC: Definitional

158. Several studies in the 1990s concluded that the consumer price index overstated inflation by about
|a. |3 percentage points per year, and that number of percentage points likely still applies now. |
|b. |3 percentage points per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to|
| |something less than 3 percentage points. |
|c. |1 percentage point per year, and that number of percentage points likely still applies now. |
|d. |1 percentage point per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to |
| |something less than 1 percentage point |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

159. Recent changes in methods used to compute the CPI have made the
|a. |upward bias in the CPI inflation rate more severe than it used to be. |
|b. |upward bias in the CPI inflation rate less severe than it used to be. |
|c. |downward bias in the CPI inflation rate more severe than it used to be. |
|d. |downward bias in the CPI inflation rate less severe than it used to be. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

160. The problems with using the consumer price index as a measure of the cost of living are important because
|a. |even the appearance of high rates of inflation cause voters to become disenchanted. |
|b. |politicians have manipulated the measurement problems to their advantage. |
|c. |many government programs use the CPI to adjust for changes in the overall level of prices. |
|d. |if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI MSC: Interpretive

161. The GDP deflator reflects the
|a. |level of prices in the base year relative to the current level of prices. |
|b. |current level of prices relative to the level of prices in the base year. |
|c. |level of real output in the base year relative to the current level of real output. |
|d. |current level of real output relative to the level of real output in the base year. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: GDP deflator MSC: Definitional

162. Two alternative measures of the overall level of prices are
|a. |the inflation rate and the consumer price index. |
|b. |the inflation rate and the GDP deflator. |
|c. |the GDP deflator and the consumer price index. |
|d. |the cost of living index and nominal GDP. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

163. The CPI and the GDP deflator
|a. |generally move together. |
|b. |generally show different patterns of movement. |
|c. |always show identical changes. |
|d. |always show different patterns of movement. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

164. An important difference between the GDP deflator and the consumer price index is that
|a. |the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index |
| |reflects the prices of goods and services bought by consumers. |
|b. |the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price |
| |index reflects the prices of goods and services bought by consumers. |
|c. |the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the |
| |consumer price index reflects the prices of all final goods and services bought by consumers. |
|d. |the GDP deflator reflects the prices of all final goods and services bought by producers and consumers, whereas the |
| |consumer price index reflects the prices of all final goods and services bought by consumers. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Definitional

165. The GDP Deflator reflects
|a. |the prices of all final goods and services currently produced domestically, as does the CPI. |
|b. |the price of a fixed basket of goods and services purchased by a typical consumer, as does the CPI. |
|c. |the prices of all final goods and services currently produced domestically, while the CPI reflects the price of a fixed |
| |basket of goods and services purchased by a typical consumer. |
|d. |the price of a fixed basket of goods and services purchased by a typical consumer, while the CPI reflects the prices of |
| |all final goods and services produced domestically. |

ANS: C DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Definitional

166. The CPI differs from the GDP deflator in that
|a. |the CPI is a price index, while the GDP deflator is an inflation index. |
|b. |substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. |
|c. |increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP |
| |deflator. |
|d. |increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not |
| |in the GDP deflator. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

167. The CPI differs from the GDP deflator in that
|a. |the CPI is an inflation index, while the GDP deflator is a price index. |
|b. |substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. |
|c. |increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the GDP deflator but not in|
| |the CPI. |
|d. |increases in the prices of domestically produced goods that are sold to the U.S. government show up in the GDP deflator |
| |but not in the CPI. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

168. An increase in the price of dairy products produced domestically will be reflected in
|a. |both the GDP deflator and the consumer price index. |
|b. |neither the GDP deflator nor the consumer price index. |
|c. |the GDP deflator but not in the consumer price index. |
|d. |the consumer price index but not in the GDP deflator. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

169. An increase in the price of bread produced domestically will be reflected in
|a. |both the GDP deflator and the consumer price index. |
|b. |neither the GDP deflator nor the consumer price index. |
|c. |the GDP deflator but not in the consumer price index. |
|d. |the consumer price index but not in the GDP deflator. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

170. If the price of domestically produced power tools increases, then
|a. |the consumer price index and the GDP deflator will both increase. |
|b. |the consumer price index will increase, and the GDP deflator will be unaffected. |
|c. |the consumer price index will be unaffected, and the GDP deflator will increase. |
|d. |the consumer price index and the GDP deflator will both be unaffected. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

171. A Japanese automobile company produces cars in the United States, with some of those cars being exported to other nations and some of them being sold within the United States. If the prices of these cars increase, then
|a. |the GDP deflator and the CPI will both increase. |
|b. |the GDP deflator will increase and the CPI will be unchanged. |
|c. |the GDP deflator will be unchanged and the CPI will increase. |
|d. |the GDP deflator and the CPI will both be unchanged. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

172. A decrease in the price of domestically produced industrial robots will be reflected in
|a. |both the GDP deflator and the consumer price index. |
|b. |neither the GDP deflator nor the consumer price index. |
|c. |the GDP deflator but not in the consumer price index. |
|d. |the consumer price index but not in the GDP deflator. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

173. A decrease in the price of domestically produced nuclear reactors will be reflected in
|a. |both the GDP deflator and the consumer price index. |
|b. |neither the GDP deflator nor the consumer price index. |
|c. |the GDP deflator but not in the consumer price index. |
|d. |the consumer price index but not in the GDP deflator. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

174. In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the
|a. |GDP deflator rises much more than does the consumer price index. |
|b. |consumer price index rises much more than does the GDP deflator. |
|c. |GDP deflator and the consumer price index rise by about the same amount. |
|d. |consumer price index rises slightly more than does the GDP deflator. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Definitional

175. In general, if a consumer good is produced domestically and consumed domestically, a decrease in its price will have which of the following effects?
|a. |The consumer price index will decrease relatively more than will the GDP deflator. |
|b. |The consumer price index and the GDP deflator will decrease by the same amount. |
|c. |The consumer price index will decrease relatively less than will the GDP deflator. |
|d. |One cannot generalize about the decrease in the consumer price index relative to the decrease in the GDP deflator. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

176. In general, if a consumer good is produced domestically and consumed domestically, an increase in its price will have which of the following effects?
|a. |The consumer price index will increase relatively more than will the GDP deflator. |
|b. |The consumer price index and the GDP deflator will increase by the same amount. |
|c. |The consumer price index will increase relatively less than will the GDP deflator. |
|d. |One cannot generalize about the increase in the consumer price index relative to the increase in the GDP deflator. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

177. The price of DVD players increases dramatically, causing a 1 percent increase in the CPI. The price increase will most likely cause the GDP deflator to increase by
|a. |more than 1 percent. |
|b. |less than 1 percent. |
|c. |1 percent. |
|d. |None of the above is correct; this particular price increase will not affect the GDP deflator. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

178. The consumer price index and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct?
|a. |The two measures are constructed differently, but they always indicate the same inflation rate. |
|b. |The substitution bias applies equally to both measures. |
|c. |A change in the price of Korean televisions is reflected in the U.S. consumer price index but not in the U.S. GDP |
| |deflator. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

179. If the price of Italian shoes imported into the United States increases, then
|a. |both the GDP deflator and the consumer price index will increase. |
|b. |neither the GDP deflator nor the consumer price index will increase. |
|c. |the GDP deflator will increase, but the consumer price index will not increase. |
|d. |the consumer price index will increase, but the GDP deflator will not increase. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

180. If the price of Spanish olives imported into the United States decreases, then
|a. |both the GDP deflator and the consumer price index will decrease. |
|b. |neither the GDP deflator nor the consumer price index will decrease. |
|c. |the GDP deflator will decrease, but the consumer price index will not decrease. |
|d. |the consumer price index will decrease, but the GDP deflator will not decrease. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

181. A decrease in the price of large tractors imported into the United States from Russia
|a. |leaves the GDP deflator unchanged but decreases the consumer price index. |
|b. |decreases the GDP deflator but leaves the consumer price index unchanged. |
|c. |decreases both the GDP deflator and the consumer price index. |
|d. |leaves both the GDP deflator and the consumer price index unchanged. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

182. Suppose that U.S. mining companies purchase German-made ore trucks at a reduced price. By itself, what effect will this purchase have on the GDP deflator and on the consumer price index?
|a. |The consumer price index and the GDP deflator will both fall. |
|b. |The consumer price index and the GDP deflator will both be unaffected. |
|c. |The consumer price index will fall, and the GDP deflator will be unaffected. |
|d. |The consumer price index will be unaffected, and the GDP deflator will fall. |

ANS: B DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

183. Most, but not all, athletic apparel sold in the United States is imported from other nations. If the price of athletic apparel increases, the GDP deflator will
|a. |increase less than will the consumer price index. |
|b. |increase more than will the consumer price index. |
|c. |not increase, but the consumer price index will increase. |
|d. |increase, but the consumer price index will not increase. |

ANS: A DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

184. An increase in the price of Irish whiskey regularly purchased by Americans will be reflected in
|a. |both the U.S. GDP deflator and the U.S. CPI. |
|b. |neither the U.S. GDP deflator nor the U.S. CPI. |
|c. |the U.S. GDP deflator, but not the U.S. CPI. |
|d. |the U.S. CPI, but not the U.S. GDP deflator. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Applicative

185. Which is the most accurate statement about the GDP deflator and the consumer price index?
|a. |The GDP deflator compares the price of a fixed basket of goods and services to the price of the basket in the base year,|
| |whereas the consumer price index compares the price of currently produced goods and services to the price of the same |
| |goods and services in the base year. |
|b. |The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the |
| |base year, whereas the GDP deflator compares the price of currently produced goods and services to the price of the same|
| |goods and services in the base year. |
|c. |Both the GDP deflator and the consumer price index compare the price of a fixed basket of goods and services to the |
| |price of the basket in the base year. |
|d. |Both the GDP deflator and the consumer price index compare the price of currently produced goods and services to the |
| |price of the same goods and services in the base year. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Definitional

186. The consumer price index and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct?
|a. |The CPI involves a base year; the GDP deflator does not involve a base year. |
|b. |The CPI can be used to compute the inflation rate; the GDP deflator cannot be used to compute the inflation rate. |
|c. |The CPI reflects the prices of goods and services produced domestically; the GDP deflator reflects the prices of all |
| |goods and services bought by consumers. |
|d. |The CPI reflects a fixed basket of goods and services; the GDP deflator reflects current production of goods and |
| |services. |

ANS: D DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

187. The basket of goods in the consumer price index changes
|a. |occasionally, as does the group of goods used to compute the GDP deflator. |
|b. |automatically, as does the group of goods used to compute the GDP deflator. |
|c. |occasionally, whereas the group of goods used to compute the GDP deflator changes automatically. |
|d. |automatically, whereas the group of goods used to compute the GDP deflator changes occasionally. |

ANS: C DIF: 2 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator MSC: Interpretive

188. In 1979 and 1980,
|a. |the U.S. inflation rate as measured by the GDP deflator was higher than that measured by the CPI, and the difference was|
| |explained by rapidly rising prices of goods exported by the U.S. |
|b. |the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was|
| |explained by rapidly rising prices of goods exported by the U.S. |
|c. |the U.S. inflation rate as measured by the GDP deflator was higher than that measured by the CPI, and the difference was|
| |explained by rapidly rising oil prices. |
|d. |the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was|
| |explained by rapidly rising oil prices. |

ANS: D DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator | Inflation rate MSC: Definitional

189. Which of the following is the most accurate statement?
|a. |In the 1970s, the late 1980s, 1990s, and 2000s, the GDP deflator and the CPI both showed high rates of inflation. |
|b. |In the 1970s, both the GDP deflator and the consumer price index showed high rates of inflation, and in the late 1980s, |
| |1990s, and 2000s, both measures showed low rates of inflation. |
|c. |In the 1970s, both the GDP deflator and the consumer price index showed low rates of inflation, and in the late 1980s, |
| |1990s, and 2000s, both measures showed high rates of inflation. |
|d. |In the 1970s, the late 1980s, 1990s, and 2000s, the GDP deflator and the CPI both showed low rates of inflation. |

ANS: B DIF: 1 REF: 24-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: CPI | GDP deflator | Inflation rate MSC: Definitional

Sec02 - Measuring the Cost of Living - Correcting Economic Variables for the Effects of Inflation

MULTIPLE CHOICE

1. The primary purpose of measuring the overall level of prices in the economy is to
|a. |allow for the measurement of GDP. |
|b. |allow consumers to know what kinds of prices to expect in the future. |
|c. |allow for the comparison of dollar figures from different points in time. |
|d. |allow for the comparison of dollar figures from the same point in time. |

ANS: C DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Definitional

2. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. Ruth's 1931 salary was equivalent to a 2007 salary of about
|a. |$5,874. |
|b. |$1,089,474. |
|c. |$1,216,000. |
|d. |$16,560,000. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

3. When we express Babe Ruth’s 1931 salary in today’s dollars and compare his salary to those of current New York Yankee players, we find that the current median salary of today’s Yankees is
|a. |about three quarters of Ruth’s salary. |
|b. |about the same as Ruth’s salary. |
|c. |about twice Ruth’s salary. |
|d. |more than four times Ruth’s salary. |

ANS: D DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Definitional

4. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover’s 1931 salary was equivalent to a 2007 salary of about
|a. |$5507. |
|b. |$1,021,382. |
|c. |$1,140,000. |
|d. |$15,525,000. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

5. You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?
|a. |five cents [pic] (1962 CPI / today's CPI) |
|b. |five cents [pic] ((today's CPI - 1962 CPI)/1962 CPI) |
|c. |five cents [pic] (today's CPI / 1962 CPI) |
|d. |five cents [pic] today's CPI - five cents [pic] 1962 CPI. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Interpretive

6. You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?
|a. |sixty cents [pic] (today's CPI - 1962 CPI) |
|b. |sixty cents [pic] (1962 CPI - today's CPI) |
|c. |sixty cents [pic] (today's CPI / 1962 CPI) |
|d. |sixty cents [pic] (1962 CPI / today's CPI) |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Interpretive

7. If the CPI was 95 in 1955 and is 475 today, then $100 today purchases the same amount of goods and services as
|a. |$4.75 purchased in 1955. |
|b. |$20.00 purchased in 1955. |
|c. |$95.00 purchased in 1955. |
|d. |$500 purchased in 1955. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

8. If the CPI was 85 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as
|a. |$37.78 purchased in 1975. |
|b. |$40.00 purchased in 1975. |
|c. |$164.71 purchased in 1975. |
|d. |$264.71 purchased in 1975. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

9. If the CPI was 104 in 1967 and is 390 today, then $10 in 1967 purchased the same amount of goods and services as
|a. |$2.67 purchases today. |
|b. |$37.50 purchases today. |
|c. |$39.00 purchases today. |
|d. |$104.00 purchases today. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

10. If the CPI was 108 in 1942 and is 420 today, then $10 in 1942 purchased the same amount of goods and services as
|a. |$2.57 purchases today. |
|b. |$28.89 purchases today. |
|c. |$31.20 purchases today. |
|d. |$38.89 purchases today. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

11. The CPI was 196 in 2005, and the CPI was 96.5 in 1982. If your parents put aside $1,000 for you in 1982, then how much would you have needed in 2005 in order to buy what you could have bought with the $1,000 in 1982?
|a. |$492.35 |
|b. |$1,960.00 |
|c. |$2,031.09 |
|d. |$9950.00 |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

12. The CPI was 172 in 2007, and the CPI was 46.5 in 1982. If your parents put aside $1,000 for you in 1982, then how much would you have needed in 2007 in order to buy what you could have bought with the $1,000 in 1982?
|a. |$270.35 |
|b. |$1,255.00 |
|c. |$2,698.92 |
|d. |$3,698.92 |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

13. In 1969, Fritz bought a Ford Mustang for $2,500. If the price index was 36.7 in 1969 and the price index was 180 in 2006, then what is the price of the Ford Mustang in 2006 dollars?
|a. |$509.72 |
|b. |$6,866.49 |
|c. |$9,761.58 |
|d. |$12,261.58 |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

14. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars?
|a. |$5.39 |
|b. |$25.00 |
|c. |$29.11 |
|d. |$37.11 |

ANS: D DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

15. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $2.4 million. A price index for nonresidential construction was 14 in 1949, 92 in 1987, and 114.5 in 2000. According to these numbers, the hospital cost about
|a. |$3.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. |
|b. |$3.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. |
|c. |$4.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. |
|d. |$4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. |

ANS: D DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

16. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $1.7 million. A price index for nonresidential construction was 24 in 1949, 108 in 1987, and 126.5 in 2000. According to these numbers, the hospital cost about
|a. |$2.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. |
|b. |$2.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. |
|c. |$2.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. |
|d. |$2.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. |

ANS: D DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

Scenario 24-1

The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read $1.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3.

17. Refer to Scenario 24-1. The price of a 1975 tennis ball in 2005 dollars is
|a. |$0.03. |
|b. |$0.27. |
|c. |$0.37. |
|d. |$1.00. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

18. Refer to Scenario 24-1. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost
|a. |$0.27, so tennis balls were cheaper in 1975. |
|b. |$0.27, so tennis balls were cheaper in 2005. |
|c. |$3.66, so tennis balls were cheaper in 1975. |
|d. |$3.66, so tennis balls were cheaper in 2005. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

Scenario 24-2

The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3.

19. Refer to Scenario 24-2. The price of a 1975 golf ball in 2005 dollars is
|a. |$0.05. |
|b. |$0.53. |
|c. |$0.73. |
|d. |$2.00. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

20. Refer to Scenario 24-2. In 1975 dollars, a 1975 golf ball cost $0.20 and a 2005 golf ball cost
|a. |$0.55, so golf balls were cheaper in 1975. |
|b. |$0.55, so golf balls were cheaper in 2005. |
|c. |$7.32, so golf balls were cheaper in 1975. |
|d. |$7.32, so golf balls were cheaper in 2005. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

21. Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 in 2001 and 265.5 in 2006. Henri's 2001 salary in 2006 dollars is
|a. |$25,000.00. |
|b. |$33,333.33. |
|c. |$44,250.00 |
|d. |$75,000.00. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

22. Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 in 2001 and 265.5 in 2006. Henri's 2006 salary in 2001 dollars is
|a. |$35,000.00. |
|b. |$46,666.67. |
|c. |$61,950.00 |
|d. |$105,000.00. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

23. Janelle earned a salary of $40,000 in 1996 and $65,000 in 2006. The consumer price index was 160 in 1996 and 266 in 2006. Janelle’s 1996 salary in 2006 dollars is
|a. |$24,060.15. |
|b. |$42,400.00. |
|c. |$43,655.17. |
|d. |$66,500.00. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

24. Janelle earned a salary of $40,000 in 1996 and $65,000 in 2006. The consumer price index was 160 in 1996 and 266 in 2006. Janelle’s 2006 salary in 1996 dollars is
|a. |$39,097.74. |
|b. |$43,062.50. |
|c. |$68,900.00. |
|d. |$108,062.50. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

25. Dewey earned a salary of $75,000 in 2001 and $95,000 in 2006. The consumer price index was 177 in 2001 and 266 in 2006. Dewey’s 2001 salary in 2006 dollars is
|a. |$37,711.86. |
|b. |$49,906.02. |
|c. |$66,750.00. |
|d. |$112,711.86. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

26. Dewey earned a salary of $75,000 in 2001 and $95,000 in 2006. The consumer price index was 177 in 2001 and 266 in 2006. Dewey’s 2006 salary in 2001 dollars is
|a. |$47,768.36. |
|b. |$63,214.29. |
|c. |$84,550.00. |
|d. |$142,768.36. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

27. Iggie took a university teaching job as an assistant professor in 1974 at a salary of $10,000. By 2003, she had been promoted to full professor, with a salary of $50,000. If the price index was 50 in 1974 and 180 in 2003, then what is Iggie's 1974 salary in 2003 dollars?
|a. |$2,777.78 |
|b. |$18,000 |
|c. |$26,000 |
|d. |$36,000 |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

28. Iggie took a university teaching job as an assistant professor in 1974 at a salary of $10,000. By 2003, she had been promoted to full professor, with a salary of $50,000. If the price index was 50 in 1974 and 180 in 2003, then what is Iggie's 2003 salary in 1974 dollars?
|a. |$13,888.89 |
|b. |$40,000 |
|c. |$65,000 |
|d. |$180,000 |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

29. Arlo is offered a job in Des Moines, where the CPI is 80, and a job in New York, where the CPI is 125. Arlo's job offer in Des Moines is for $42,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?
|a. |$42,000 |
|b. |$65,625 |
|c. |$68,880 |
|d. |$189,000 |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

30. Arlo is offered a job in Des Moines, where the CPI is 60, and a job in New York, where the CPI is 125. Arlo's job offer in Des Moines is for $48,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?
|a. |$23,040 |
|b. |$52,000 |
|c. |$79,200 |
|d. |$100,000 |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

31. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is
|a. |$75,000; thus, Ruben's purchasing power increased between 2001 and 2006. |
|b. |$75,000; thus, Ruben's purchasing power decreased between 2001 and 2006. |
|c. |$85,000; thus, Ruben's purchasing power increased between 2001 and 2006. |
|d. |$85,000; thus, Ruben's purchasing power decreased between 2001 and 2006. |

ANS: A DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

32. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2006 salary in 2001 dollars is
|a. |$20,000; thus, Ruben's purchasing power increased between 2001 and 2006. |
|b. |$20,000; thus, Ruben's purchasing power decreased between 2001 and 2006. |
|c. |$64,000; thus, Ruben's purchasing power increased between 2001 and 2006. |
|d. |$64,000; thus, Ruben's purchasing power decreased between 2001 and 2006. |

ANS: C DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

33. In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the CPI was 40 in 1970, 60 in 1980, and 100 in 1990, then in real terms, Professor Plum's salary was highest in
|a. |1980 and lowest in 1970. |
|b. |1980 and lowest in 1990. |
|c. |1990 and lowest in 1970. |
|d. |1990 and lowest in 1980. |

ANS: A DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

34. In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the CPI was 40 in 1970, 70 in 1980, and 130 in 1990, then in real terms, Professor Plum's salary was highest in
|a. |1970 and lowest in 1980. |
|b. |1970 and lowest in 1990. |
|c. |1980 and lowest in 1970. |
|d. |1980 and lowest in 1990. |

ANS: D DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

Scenario 24-3

Grant Gant was a doctor in 1944 and earned $12,000 that year. His daughter, Gretta Gant, is a doctor today and she earned $210,000 in 2005. The price index was 17.6 in 1944 and 184 in 2005.

35. Refer to Scenario 24-3. Grant Gant’s 1944 income in 2005 dollars is
|a. |$1,147.83. |
|b. |$113,454.55. |
|c. |$125,454.55. |
|d. |$1,996,800.00. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

36. Refer to Scenario 24-3. Gretta Gant’s 2005 income in 1944 dollars is
|a. |$11,931.82. |
|b. |$20,086.96. |
|c. |$1,985,454.55. |
|d. |$2,195,454.55. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

37. Refer to Scenario 24-3. In real terms, Gretta Gant’s income amounts to about what percentage of Grant Gant’s income?
|a. |67 percent |
|b. |167 percent |
|c. |1045 percent |
|d. |1750 percent |

ANS: B DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

38. Refer to Scenario 24-3. In real terms, Grant Gant’s income amounts to about what percentage of Gretta Gant’s income?
|a. |5.71 percent |
|b. |9.6 percent |
|c. |59.7 percent |
|d. |67.4 percent |

ANS: C DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Analytical

Scenario 24-4

Quinn has job offers in Wrexington and across the country in Charlieville. The Wrexington job would pay a salary of $50,000 per year, and the Charlieville job would pay a salary of $40,000 per year. The CPI in Wrexington is 150, and the CPI in Charlieville is 90.

39. Refer to Scenario 24-4. The Wrexington salary in Charlieville dollars is
|a. |$30,000.00. |
|b. |$33,333.33. |
|c. |$45,000.00 |
|d. |$83,333.33. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

40. Refer to Scenario 24-4. The Charlieville salary in Wrexington dollars is
|a. |$24,000.00. |
|b. |$26,666.67. |
|c. |$60,000.00 |
|d. |$66,666.67. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

41. Refer to Scenario 24-4. If Quinn only cares about maximizing her purchasing power, then she should
|a. |take the Charlieville job. |
|b. |take the Wrexington job. |
|c. |take either job because they both have the same purchasing power. |
|d. |The answer cannot be determined from the information given because a salary is not the same as purchasing power. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

42. Suppose the CPI was 108 in 1967, and suppose one must spend $936 today to obtain the same basket of goods and services that could be bought for $200 in 1967. Then today’s CPI is
|a. |116.67. |
|b. |131.08. |
|c. |397.44. |
|d. |505.44. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

43. Suppose today’s CPI is 134.85, and suppose one must spend $580 today to purchase the same basket of goods and services that could be bought for $400 in 1989. Then the CPI in 1989 was
|a. |24.27. |
|b. |60.68. |
|c. |93.00. |
|d. |195.53. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

44. In 1964, one could buy a chili dog and a root beer for $1.25. Today the same chili dog and root beer cost $2.95. Which pair of CPIs would imply that the cost in today's dollars was the same for both meals?
|a. |60 in 1964 and 141.6 today |
|b. |75 in 1964 and 126.4 today |
|c. |80 in 1964 and 112 today |
|d. |90 in 1964 and 108.5 today |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

45. In 1972, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50. If the same goods today cost $6.00, then which pair of CPIs would make the cost in today's dollars the same for both years?
|a. |60 in 1972 and 150 today |
|b. |65 in 1972 and 156 today |
|c. |75 in 1972 and 160 today |
|d. |90 in 1972 and 145.8 today |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

46. In 1972, one could buy model rocket engines for $1.50 each. If those same engines cost $2.50 each today, then which pair of CPIs would make the engine prices in today's dollars the same for both years?
|a. |60 in 1972 and 95 today |
|b. |60 in 1972 and 120 today |
|c. |90 in 1972 and 140 today |
|d. |96 in 1972 and 160 today |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

47. Piper is offered a job in Seattle that pays $50,000 and a job in Boston that pays $60,000. Which pair of CPIs would make the two salaries have the same purchasing power?
|a. |80 in Seattle and 100 in Boston |
|b. |125 in Seattle and 150 in Boston |
|c. |100 in Seattle and 124.5 in Boston |
|d. |100 in Seattle and 140 in Boston |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

48. Mavis is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Memphis that pays $64,000. Which pair of CPIs would make the two salaries have the same purchasing power?
|a. |90 in Minneapolis and 80 in Memphis |
|b. |90 in Minneapolis and 72 in Memphis |
|c. |90 in Minneapolis and 66 in Memphis |
|d. |90 in Minneapolis and 50 in Memphis |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Comparing dollar figures MSC: Applicative

49. When box office receipts are corrected for inflation, the most popular movie of all time is
|a. |Star Wars. |
|b. |Titanic. |
|c. |Gone With the Wind. |
|d. |The Sound of Music. |

ANS: C DIF: 1 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation
MSC: Definitional

50. Indexation refers to
|a. |a process of adjusting the nominal interest rate so that it is equal to the real interest rate. |
|b. |using a law or contract to automatically correct a dollar amount for the effects of inflation. |
|c. |using a price index to deflate dollar values. |
|d. |an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator. |

ANS: B DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Definitional

51. A COLA automatically raises the wage when
|a. |GDP increases. |
|b. |taxes increase. |
|c. |the consumer price index increases. |
|d. |the producer price index increases. |

ANS: C DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: COLA MSC: Definitional

52. Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by
|a. |$0.04. |
|b. |$0.29. |
|c. |$0.30. |
|d. |$0.50. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Applicative

53. Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $8.00 an hour and is scheduled to index their wages today. If the CPI is currently 160 and was 128 a year ago, the firm should increase the hourly wages of its workers by
|a. |$0.25. |
|b. |$1.60. |
|c. |$2.00. |
|d. |$2.56. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Applicative

54. Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct?
|a. |The newspaper editorial is correct under all circumstances. |
|b. |The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market|
| |basket used to compute the CPI. |
|c. |The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a |
| |different rate than the prices of the goods in the market basket used to compute the CPI |
|d. |The newspaper editorial is incorrect under all circumstances. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Social Security | Indexation MSC: Interpretive

55. Of Social Security benefits and federal income tax brackets, which is indexed?
|a. |Both are indexed. |
|b. |Only Social Security benefits are indexed. |
|c. |Only federal income tax brackets are indexed. |
|d. |Neither is indexed. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Interpretive

56. Marion collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 108 between 1985 and 1986, then her Social Security payments for 1986 should have been
|a. |$228. |
|b. |$238. |
|c. |$257. |
|d. |$264. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Applicative

57. Marion collected Social Security payments of $250 a month in 1985. If the price index rose from 90 to 108 between 1985 and 1986, then her Social Security payments for 1986 should have been
|a. |$268. |
|b. |$292. |
|c. |$300. |
|d. |$358. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Indexation MSC: Applicative

58. Which of the following statements is correct about the relationship between inflation and interest rates?
|a. |There is no relationship between inflation and interest rates. |
|b. |The interest rate is determined by the rate of inflation. |
|c. |In order to fully understand inflation, we need to know how to correct for the effects of interest rates. |
|d. |In order to fully understand interest rates, we need to know how to correct for the effects of inflation. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Interest rates | Inflation MSC: Interpretive

59. Which of the following is not correct?
|a. |If the inflation rate exceeds the nominal interest rate, then the purchasing power of an interest-earning deposit falls |
| |over time. |
|b. |If there is deflation, then the purchasing power of an interest-earning deposit rises by more than the nominal interest |
| |rate over time. |
|c. |The higher the rate of inflation, the smaller the increase in the purchasing power of an interest-earning deposit. |
|d. |The purchasing power of an interest-earning deposit can increase or decrease over time, but it cannot stay the same. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Interest rates | Inflation MSC: Interpretive

60. Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?
|a. |The real interest rate is the nominal interest rate times the rate of inflation. |
|b. |The real interest rate is the nominal interest rate minus the rate of inflation. |
|c. |The real interest rate is the nominal interest rate plus the rate of inflation. |
|d. |The real interest rate is the nominal interest rate divided by the rate of inflation. |

ANS: B DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Definitional

61. The nominal interest rate tells you
|a. |how fast the number of dollars in your bank account rises over time. |
|b. |how fast the purchasing power of your bank account rises over time. |
|c. |the number of dollars in your bank account today. |
|d. |the purchasing power of your bank account today. |

ANS: A DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate MSC: Definitional

62. The real interest rate tells you
|a. |how fast the number of dollars in your bank account rises over time. |
|b. |how fast the purchasing power of your bank account rises over time. |
|c. |the number of dollars in your bank account today. |
|d. |the purchasing power of your bank account today. |

ANS: B DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Definitional

63. Which of the following statements about real and nominal interest rates is correct?
|a. |Real interest rates can be either positive or negative, but nominal interest rates must be positive. |
|b. |Real interest rates and nominal interest rates must be positive. |
|c. |Real interest rates must be positive, but nominal interest rates can be either positive or negative. |
|d. |Real interest rates and nominal interest rates can be either positive or negative. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Interpretive

64. Which of the following statements about real and nominal interest rates is correct?
|a. |When the nominal interest rate is rising, the real interest rate is necessarily rising; when the nominal interest rate |
| |is falling, the real interest rate is necessarily falling. |
|b. |If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent.|
|c. |An increase in the real interest rate is necessarily accompanied by either an increase in the nominal interest rate, an |
| |increase in the inflation rate, or both. |
|d. |When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate. |

ANS: D DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Analytical

65. As long as prices are rising over time, then
|a. |the nominal interest rate exceeds the real interest rate. |
|b. |the real interest rate exceeds the nominal interest rate. |
|c. |the real interest rate is positive. |
|d. |the nominal interest rate is a better indicator than the real interest rate of how fast the purchasing power of your |
| |bank account is changing over time. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Interpretive

66. If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is
|a. |-5 percent. |
|b. |1.67 percent. |
|c. |5 percent. |
|d. |11 percent. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

67. If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is
|a. |-4 percent. |
|b. |2 percent. |
|c. |4 percent. |
|d. |8 percent. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

68. If the nominal interest rate is 6 percent and the rate of inflation is 9 percent, then the real interest rate is
|a. |-3 percent. |
|b. |-0.33 percent. |
|c. |3 percent. |
|d. |15 percent. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

69. If the nominal interest rate is 5 percent and the rate of inflation is 9 percent, then the real interest rate is
|a. |-4 percent. |
|b. |-0.44 percent. |
|c. |4 percent. |
|d. |14 percent. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

70. If the nominal interest rate is 1.5 percent and the rate of inflation is -0.5 percent, then the real interest rate is
|a. |-4 percent. |
|b. |-2 percent. |
|c. |1 percent. |
|d. |2 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

71. If the nominal interest rate is 7.5 percent and the rate of inflation is -2.5 percent, then the real interest rate is
|a. |-10 percent. |
|b. |-5 percent. |
|c. |5 percent. |
|d. |10 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Applicative

72. If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation rate is
|a. |-2.5 percent. |
|b. |0.45 percent. |
|c. |2.5 percent. |
|d. |13.5 percent. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

73. If the nominal interest rate is 8 percent and the real interest rate is 4.5 percent, then the inflation rate is
|a. |-3.5 percent. |
|b. |0.78 percent. |
|c. |3.5 percent. |
|d. |12.5 percent. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

74. If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is
|a. |-9.5 percent. |
|b. |-4.5 percent. |
|c. |4.5 percent. |
|d. |9.5 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

75. If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is
|a. |-6.5 percent. |
|b. |-1.5 percent. |
|c. |1.5 percent. |
|d. |6.5 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

76. If the nominal interest rate is 4 percent and the real interest rate is 7 percent, then the inflation rate is
|a. |-3 percent. |
|b. |0.75 percent. |
|c. |3 percent. |
|d. |11 percent. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

77. If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is
|a. |-2 percent. |
|b. |0.4 percent. |
|c. |2 percent. |
|d. |12 percent. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

78. The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?
|a. |2.5 percent |
|b. |4.0 percent |
|c. |6.76 percent |
|d. |10.5 percent |

ANS: A DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Analytical

79. The consumer price index was 225 in 2006 and 236 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?
|a. |1.6 percent |
|b. |4.9 percent |
|c. |6.82 percent |
|d. |11.4 percent |

ANS: A DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Analytical

80. During a certain year, the consumer price index increased from 150 to 159 and the purchasing power of a person’s bank account increased by 3.5 percent. For that year,
|a. |the nominal interest rate was 6 percent. |
|b. |the nominal interest rate was 9.5 percent. |
|c. |the inflation rate was 3.5 percent. |
|d. |the inflation rate was 9.5 percent. |

ANS: B DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate MSC: Analytical

81. The CPI was 120 in 2000 and 132 in 2001. Dorgan borrowed money in 2000 and repaid the loan in 2001. If the nominal interest rate on the loan was 12 percent, then the real interest rate was
|a. |2 percent. |
|b. |10 percent. |
|c. |12 percent. |
|d. |22 percent. |

ANS: A DIF: 3 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Real interest rate MSC: Analytical

82. Suppose that over the past year, the real interest rate was 3 percent and the inflation rate was -1 percent. It follows that
|a. |the dollar value of savings increased at 2 percent, and the purchasing power of savings increased at 3 percent. |
|b. |the dollar value of savings increased at 2 percent, and the purchasing power of savings increased at 4 percent. |
|c. |the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 2 percent. |
|d. |the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 3 percent. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

83. Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was -2 percent. It follows that
|a. |the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 6 percent. |
|b. |the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 8 percent. |
|c. |the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 4 percent. |
|d. |the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 6 percent. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

84. Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that
|a. |the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 2 percent. |
|b. |the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 8 percent. |
|c. |the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 2 percent. |
|d. |the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 5 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

85. Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that
|a. |the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 2 percent. |
|b. |the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 10 percent. |
|c. |the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 2 percent. |
|d. |the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

86. Ralph puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year,
|a. |Ralph will have 3 percent more money, which will purchase 5 percent more goods. |
|b. |Ralph will have 3 percent more money, which will purchase 7 percent more goods. |
|c. |Ralph will have 5 percent more money, which will purchase 3 percent more goods. |
|d. |Ralph will have 5 percent more money, which will purchase 7 percent more goods. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

87. Sophia deposits $1,000 in a savings account that pays an annual interest rate of 4 percent. Over the course of a year, the inflation rate is 1 percent. At the end of the year, Sophia has
|a. |$30 more in her account, and her purchasing power has increased by $10. |
|b. |$30 more in her account, and her purchasing power has increased by $40. |
|c. |$40 more in her account, and her purchasing power has increased by $30. |
|d. |$50 more in her account and her purchasing power has increased by $40. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

88. Maxine deposits $100 in a bank account that pays an annual interest rate of 20%. A year later, after Maxine has accumulated $20 in interest, she withdraws her $120. Maxine’s purchasing power
|a. |did not change if the inflation rate was 0%. |
|b. |decreased if the inflation rate was -2%. |
|c. |increased if the inflation rate was 5%. |
|d. |More than one of the above is correct. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Interest rates | Inflation rate MSC: Applicative

89. Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the $5,000. From this, we can conclude that the rate of inflation during the year was
|a. |-4 percent. |
|b. |4 percent. |
|c. |6 percent. |
|d. |14 percent. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate
MSC: Applicative

90. Ms. Take borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that year, the price level went up by 15 percent. Which of the following statements is correct?
|a. |Ms. Take will repay the bank fewer dollars than she initially borrowed. |
|b. |Ms. Take's repayment will give the bank less purchasing power than it originally loaned her. |
|c. |Ms. Take's repayment will give the bank greater purchasing power than it originally loaned her. |
|d. |Ms. Take's repayment will give the bank the same purchasing power that it originally loaned her. |

ANS: B DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Applicative

91. Which of the following is not correct?
|a. |The U.S. economy has never experienced deflation. |
|b. |Since 1965, the U.S. nominal interest rate has exceeded the U.S. real interest rate. |
|c. |Since 1965, the U.S. economy has experienced rising consumer prices every year. |
|d. |During deflation, the real interest rate exceeds the nominal interest rate. |

ANS: A DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: U.S. interest rates | U.S. inflation rate MSC: Interpretive

92. Which of the following is correct?
|a. |Nominal and real interest rates always move together. |
|b. |Nominal and real interest rates never move together. |
|c. |Nominal and real interest rates do not always move together. |
|d. |Nominal and real interest rates always move in opposite directions. |

ANS: C DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Nominal interest rate | Real interest rate MSC: Interpretive

93. In the United States in the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were
|a. |very high. |
|b. |high. |
|c. |low, but never negative. |
|d. |low, and in some years they were negative. |

ANS: D DIF: 2 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: U.S. interest rates MSC: Interpretive

94. In the United States, nominal interest rates were
|a. |high in the 1970s and 1990s. |
|b. |low in the 1970s and 1990s. |
|c. |high in the 1970s and low in the 1990s. |
|d. |low in the 1970s and high in the 1990s. |

ANS: C DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: U.S. interest rates MSC: Definitional

95. In the United States, real interest rates were
|a. |high in the 1970s and 1990s. |
|b. |low in the 1970s and 1990s. |
|c. |high in the 1970s and low in the 1990s. |
|d. |low in the 1970s and high in the 1990s. |

ANS: D DIF: 1 REF: 24-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: U.S. interest rates MSC: Definitional

Chapter 25
Production and Growth

TRUE/FALSE

1. If per capita real income grows by 2 percent per year, then it will double in approximately 20 years.
ANS: F DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

2. Over the period 1870-2006, the United States experienced an average annual growth rate of real GDP per person of about 4 percent per year.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

3. In 2006, income per person in the United States was about 12 times that in India.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

4. Over the period 1900-2006, Brazil’s rate of economic growth exceeded that of China.
ANS: T DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

5. If a country has a higher level of productivity than another, then it also has a higher level of real GDP.
ANS: F DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Analytical

6. International data on real GDP per person give us a sense of how standards of living vary across countries.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Real GDP
MSC: Definitional

7. Real GDP per person in rich countries, such as Germany, is sometimes more than 10 times that of poor countries like Pakistan.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

8. Both the standard of living and the growth of real GDP per person vary widely across countries.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth
TOP: Standard of living | Real GDP MSC: Definitional

9. If they could increase their growth rates slightly, countries with low income would catch up with rich countries in about ten years.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth
TOP: Economic growth | Catch-up effect MSC: Interpretive

10. In the United States real GDP per person is about $44,000, while in some poor countries real GDP per person is less than $3,000.
ANS: T DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

11. Although growth rates across countries vary some, rankings of countries by income remain pretty much the same over time.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

12. International data on the history of real GDP growth rates shows that over the last 100 years or so, rich countries got richer and poor countries got poorer.
ANS: F DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

13. Productivity can be computed as number of hours worked divided by output.
ANS: F DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Definitional

14. Indonesians, for example, have a lower standard of living than Americans because they have a lower level of productivity.
ANS: T DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive

15. If Country A produces 6,000 units of goods and services using 600 hours of labor, and if Country B produces 5,000 units of goods and services using 450 units of labor, then productivity is higher in Country B than in Country A.
ANS: T DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

16. Like physical capital, human capital is a produced factor of production.
ANS: T DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Physical capital | Human capital MSC: Interpretive

17. Human capital is the term economists use to refer to the knowledge and skills that workers acquire through education, training, and experience.
ANS: T DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Human capital
MSC: Definitional

18. A forest is an example of a nonrenewable resource.
ANS: F DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Natural resources
MSC: Definitional

19. Historical trends in the prices of most natural resources compared to prices of other goods indicate that natural resources have become scarcer over time.
ANS: F DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Natural resources
MSC: Interpretive

20. It is possible for a country without a lot of domestic natural resources to have a high standard of living.
ANS: T DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Natural resources | Standard of living MSC: Interpretive

21. Constant returns to scale is the point on a production function where increasing inputs will no longer increase output.
ANS: F DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Constant returns to scale
MSC: Interpretive

22. As capital per worker rises, output per worker rises. However, the increase in output per worker from an addition to capital is smaller, the larger is the existing amount of capital per worker.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Production function
MSC: Analytical

23. An increase in the saving rate does not permanently increase the growth rate of real GDP per person.
ANS: T DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving rate
MSC: Definitional

24. Other things the same, another unit of capital will increase output by more in a poor country than in a rich country.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Diminishing returns MSC: Interpretive

25. The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely ever to experience the economic growth rates of wealthier countries.
ANS: F DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Interpretive

26. Two countries with the same saving rates must have the same growth rate of real GDP per person.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving rate | Catch-up effect
MSC: Definitional

27. When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more than does production in Russia (that is, Russian GDP).
ANS: F DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Foreign investment
MSC: Applicative

28. If your company opens and operates a branch in a foreign country, you will be engaging in foreign direct investment.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance TOP: Foreign investment
MSC: Definitional

29. Investment in human capital has opportunity costs, but investment in physical capital does not.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Opportunity costs | Human capital | Physical capital MSC: Interpretive

30. Incentives for parents to send their children to school, such as small monthly payments to parents if their children have regular attendance, appear to increase school attendance.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

31. A country that made its courts less corrupt and its government more stable would likely see its standard of living rise.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Definitional

32. If a country made it easier for people to establish and prove the ownership of their property, real GDP per person would likely rise.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Interpretive

33. Economists generally believe that inward-oriented policies are more likely to foster growth than outward oriented policies.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Definitional

34. If a rich country reduced subsidies to domestic producers who produce goods for which poor countries have a comparative advantage, the standard of living in these poor countries would likely rise.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Definitional

35. One reason that governments may find it useful to sponsor universities and basic research is that to a large extent knowledge is generally a private good.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Public goods
MSC: Interpretive

36. The population growth rate tends to be higher in developed countries than in developing countries.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

37. In countries where women are discriminated against, policies that increase the likelihood of career success and educational opportunities for women are likely to decrease the birth rate.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

38. Countries with high population growth rates tend to have lower levels of educational attainment.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

39. Studies confirm that controlling for other variables such as the percentage of GDP devoted to investment, poor countries tend to grow at a faster rate than rich countries.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Definitional

40. An increase in capital increases productivity only if it is purchased and operated by domestic residents.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Foreign investment
MSC: Definitional

41. Other things the same, an economy’s factors of production are likely to be used more effectively if there is an economywide respect for property rights.
ANS: T DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Definitional

42. Economist Michael Kremer found that world growth rates fell as population increased.
ANS: F DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

SHORT ANSWER

1. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use these numbers to compute the percentage increase in real GDP per person from 1987 to 2005.

|Year |Real GDP (2000 prices) |Population |
|1987 |$6,435,000 million |243 million |
|2005 |$11,092,000 million |296.6 million |

ANS:
Real GDP per person in 1987 was $6,435,000/243= about $26,481. Income per person in 2005 was $11,092,000/296.6 = about $37,397. Income per person grew by (37,397 - 26,481)/26,481 = about 41.2 percent.

DIF: 1 REF: 25-1 NAT: Analytic
LOC: Productivity and growth TOP: Real GDP | Economic growth
MSC: Applicative

2. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and standard of living mean. Make a list of things that determine labor productivity.
ANS:
The standard of living is a measure of how well people live. Income per person is an important dimension of the standard of living and is positively correlated with other things such as nutrition and life expectancy that make people better off. Productivity measures how much people can produce in an hour. As productivity increases, people can produce more (and use less to produce the same amount) and so their standard of living increases.

The factors that determine labor productivity include the amounts of physical capital (equipment and structures), human capital (knowledge and skills), and natural resources available to workers, as well as the state of technological knowledge in society.

DIF: 2 REF: 25-1 NAT: Analytic
LOC: Productivity and growth TOP: Productivity | Standard of living
MSC: Interpretive

3. What is a production function? Write an equation for a typical production function, and explain what each of the terms represents.
ANS:
A production function is a mathematical representation of the relationship between the quantity of inputs used in production and the quantity of output produced using these inputs. A typical production function could be written as Y = A F(L, K, H, N), where Y denotes the quantity of output, L the quantity of labor, K the quantity of physical capital, H the quantity of human capital, N the quantity of natural resources, and A is a variable that reflects the available production technology.

DIF: 2 REF: 25-2 NAT: Analytic
LOC: The Study of economics, and definitions of economics TOP: Production function
MSC: Interpretive

4. What is the difference between human capital and technology?
ANS:
Technology is society's understanding of production techniques. Human capital is the labor force's understanding of these ideas. A society may have lots of information available about how to produce goods, but still have lots of people who know little of this information. For example, in the United States there exists information about how best to use a butter churn and how to make lye soap, but most people know nothing about it.

DIF: 2 REF: 25-2 NAT: Analytic
LOC: Productivity and growth TOP: Human capital | Technology
MSC: Interpretive

5. The catch-up effect says that countries with low income can grow faster than countries with higher income. However, in statistical studies that include many diverse countries we do not observe the catch-up-effect unless we control for other variables that affect productivity. Considering the determinants of productivity, list and explain some things that would tend to prohibit or limit a poor country's ability to catch up with the rich ones.
ANS:
The argument that poor countries will tend to catch up with rich ones is based on the idea that another unit of capital will increase output more in a country that has little capital than one that has much capital. So, for a given share of GDP devoted to investment, a poor country will grow faster than a rich one.

This argument assumes that other things are the same, but share of GDP invested may be lower in a poor country and the productivity of investment may be less. A politically unstable environment where property rights are unprotected or not secure tends to discourage investment. A country that has limited trade because of legal restrictions or geography cannot focus on producing what it produces best and so has lower productivity. To get the most out of investment, or even simply to use some types of new investment, requires having workers who have acquired some basic human capital.

DIF: 3 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Catch-up effect
MSC: Analytical

6. Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from 1960-1991. However, during these same years South Korea had a 6 percent growth rate of average annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different?
ANS:
The explanation is based on the concept of diminishing returns to capital. A country that has a lot of income, and so a lot of capital, gains less by adding more capital than does a country that currently has little capital. It is easy to envision how a poor country without much capital could increase its output considerably with even a little more capital.

DIF: 2 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Investment | Catch-up effect | Diminishing returns
MSC: Analytical

7. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?
ANS:
In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.

DIF: 2 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Productivity MSC: Definitional

8. Why does a nation’s standard of living depend on property rights?
ANS:
Property rights are an important prerequisite for the price system to work in a market economy. If an individual or company is not confident that claims over property or over the income from property can be protected, or that contracts can be enforced, there will be little incentive for individuals to save, invest, or start new businesses. Likewise, there will be little incentive for foreigners to invest in the real or financial assets of the country. The distortion of incentives will reduce efficiency in resource allocation and will reduce saving and investment which in turn will reduce the standard of living.

DIF: 2 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Property rights
MSC: Interpretive

9. How do outward-oriented policies affect a nation's productivity?
ANS:
Most economists believe that poor nations are better off pursuing outward-oriented policies that promote free trade. Countries that use their comparative advantage in trade are, in effect, helping themselves through the gains from trade in the same way that nations that develop new technology raise their standard of living. Hence, a country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance. Inward-oriented trade policies are akin to a country choosing to restrict the use of superior technologies.

DIF: 1 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

10. At first patents might seem like a deterrent to growth because in effect they restrict the use of new technology. Yet many economists believe that patents generate growth. Explain why.
ANS:
Once someone comes up with an idea it is often easy for others to take advantage of it so that the idea becomes part of a society’s knowledge. So, knowledge is frequently a public good. Without patents an inventor’s reward for research and development of a good idea would be smaller. So, patents increase the incentives for firms and individuals to engage in research. The negative consequences of temporarily restricting the use of new ideas with patents is outweighed by the increase in new ideas that patents induce.

DIF: 2 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

11. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?
ANS:
Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.

DIF: 2 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Population growth | Standard of living
MSC: Interpretive

12. Compare and contrast the population theories of Malthus and Kremer.
ANS:
The difference is that Malthus predicted that population growth would be greater than growth in the ability to increase output. He believed that people would continue to populate the earth until output reached a subsistence level. On the other hand Kremer argues that population growth increased productivity allowing people to improve their standard of living despite growing population. Kremer argues that with more population comes more innovations. The improvements in technology outweighed any adverse impact of the increase in population on the standard of living.

DIF: 2 REF: 25-3 NAT: Analytic
LOC: Productivity and growth TOP: Population growth | Economists
MSC: Interpretive

Sec00 - Production and Growth

MULTIPLE CHOICE

1. The average income in a rich country, such as the United States or Japan, is more than
|a. |3 times, but less than 5 times, the average income in a poor country, such as Indonesia or Nigeria. |
|b. |5 times, but less than 10 times, the average income in a poor country, such as Indonesia or Nigeria. |
|c. |10 times, but less than 20 times, the average income in a poor country, such as Indonesia or Nigeria. |
|d. |more than 20 times the average income in a poor country, such as Indonesia or Nigeria. |

ANS: C DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

2. Over the past century in the United States, real GDP per person has grown, on average, by about
|a. |1 percent per year. |
|b. |2 percent per year. |
|c. |3 percent per year. |
|d. |5 percent per year. |

ANS: B DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

3. During the past century the average growth rate of U.S. real GDP per person implies that it doubled, on average, about every
|a. |100 years. |
|b. |70 years. |
|c. |35 years. |
|d. |25 years. |

ANS: C DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

4. In the United States, as measured by real GDP per person, average income is about how many times as high as average income a century ago?
|a. |2 |
|b. |4 |
|c. |6 |
|d. |8 |

ANS: D DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

5. Over the last century, U.S. real GDP per person grew at a rate of about
|a. |2 percent per year, so that it is now 2 times as high as it was a century ago. |
|b. |2 percent per year, so that it is now 8 times as high as it was a century ago. |
|c. |4 percent per year, so that it is now 2 times as high as it was a century ago. |
|d. |4 percent per year, so that it is now 8 times as high as it was a century ago. |

ANS: B DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

6. Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If, in the next 100 years, it doubles every 25 years, then a century from now U.S. real GDP per person will be
|a. |4 times higher than it is now. |
|b. |8 times higher than it is now. |
|c. |12 times higher than it is now. |
|d. |16 times higher than it is now. |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

7. Over the past century in the United States, average income as measured by real GDP per person has grown about
|a. |4 percent per year, which implies a doubling about every 18 years. |
|b. |4 percent per year, which implies a doubling about every 8 years. |
|c. |2 percent per year, which implies a doubling about every 35 years. |
|d. |2 percent per year, which implies a doubling about every 18 years. |

ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

8. In which of the following countries has economic growth been sufficiently strong in recent history to propel that country from being among the poorest in the world to being among the richest in the world?
|a. |India |
|b. |Mexico |
|c. |Nigeria |
|d. |Singapore |

ANS: D DIF: 1 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

9. Average income has been stagnant for many years in
|a. |Argentina. |
|b. |Singapore. |
|c. |Nigeria. |
|d. |All of the above are correct. |

ANS: C DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

10. Which of the following statements is correct?
|a. |The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a good gauge of economic |
| |progress. |
|b. |The level of real GDP is a good gauge of economic progress, and the growth of real GDP is a good gauge of economic |
| |prosperity. |
|c. |The level of real GDP is a good gauge of economic prosperity, and the level of real GDP per person is a good gauge of |
| |economic progress. |
|d. |The level of real GDP is a good gauge of economic progress, and the level of real GDP per person is a good gauge of |
| |economic prosperity. |

ANS: A DIF: 2 REF: 25-0
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

Sec01 - Production and Growth - Economic Growth around the World

MULTIPLE CHOICE

1. You are told that Country A experienced growth of real GDP per person of 4 percent per year throughout the 1900s. In view of other countries’ experience, you would have to characterize Country A’s growth as
|a. |exceptionally high. |
|b. |moderately high. |
|c. |moderately low. |
|d. |exceptionally low. |

ANS: A DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

2. You are told that Country A experienced growth of real GDP per person of 0.5 percent per year throughout the 1900s. In view of other countries’ experience, you would have to characterize Country A’s growth as
|a. |exceptionally high. |
|b. |moderately high. |
|c. |moderately low. |
|d. |exceptionally low. |

ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

3. As of 2006, using real GDP per person as a measure, we would classify
|a. |the United States and Mexico as advanced economies and Bangladesh as a middle-income country. |
|b. |Canada as an advanced economy, Mexico as a middle-income country, and Mali as a poor country. |
|c. |Japan and India as advanced economies and Mexico as a poor country. |
|d. |Japan as an advanced economy, the United Kingdom as a middle-income country, and Argentina as a poor country. |

ANS: B DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Interpretive

4. Over the period 1900-2006, which of the following countries experienced the highest average annual growth rate of real GDP per person?
|a. |Indonesia |
|b. |India |
|c. |Pakistan |
|d. |Brazil |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

5. A nation's standard of living is best measured by its
|a. |real GDP. |
|b. |real GDP per person. |
|c. |nominal GDP. |
|d. |nominal GDP per person. |

ANS: B DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Interpretive

6. If one wants to know how the material well-being of the average person has changed over time in a given country, one should look at the
|a. |level of real GDP. |
|b. |growth rate of nominal GDP. |
|c. |growth rate of real GDP. |
|d. |growth rate of real GDP per person. |

ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Interpretive

7. The level of real GDP person
|a. |differs widely across countries, but the growth rate of real GDP per person is similar across countries. |
|b. |is very similar across countries, but the growth rate of real GDP per person differs widely across countries. |
|c. |and the growth rate of real GDP per person are similar across countries. |
|d. |and the growth rate of real GDP per person vary widely across countries. |

ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

8. Which of the following statements is correct? In 2006,
|a. |real income per person in the U.S. was about 6 times that in China. |
|b. |real income per person in China was about 2 times that in India. |
|c. |the typical resident of India had less real income than the typical resident of England in 1870. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

9. Which of the following statements is correct?
|a. |In 1870, real income per person was higher in the United Kingdom than in any other country at that time. |
|b. |Between 1870 and 2006, India experienced significantly stronger growth of real income per person than did the United |
| |States. |
|c. |Between 1870 and 2006, the United States experienced significantly stronger growth of real income per person than did |
| |Canada. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

10. In 2006, real GDP per person in Bangladesh was
|a. |about 3 times as high as it was in the U.S. in 1870. |
|b. |about twice as high as it was in the U.S. in 1870. |
|c. |about the same as it was in the U.S. in 1870. |
|d. |less than it was in the U.S. in 1870. |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

11. In 2006, the typical Bangladeshi had about
|a. |1/5 the real income of a typical American a century ago. |
|b. |2/3 the real income of a typical American a century ago. |
|c. |2 times as much real income as that of a typical American a century ago. |
|d. |4 times as much real income as that of a typical American a century ago. |

ANS: B DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

12. Which of the following countries had the highest growth rate over the last 100 or so years?
|a. |Brazil |
|b. |Germany |
|c. |Canada |
|d. |United States |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

13. In recent decades, average income in some East Asian countries, such as South Korea, Singapore, and Taiwan, has risen about
|a. |2 percent per year. |
|b. |4 percent per year. |
|c. |7 percent per year. |
|d. |10 percent per year. |

ANS: C DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

14. In some East Asian countries, average income, as measured by real GDP per person, has recently grown at an average annual rate that implies output will double about every
|a. |10 years. |
|b. |15 years. |
|c. |20 years. |
|d. |25 years. |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

15. Countries that grew the fastest over the last 100 or so years had growth rates of real income per person of about
|a. |0.5 percent per year. |
|b. |1.5 percent per year. |
|c. |2.0 percent per year. |
|d. |2.5 percent per year. |

ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

16. Of the following countries, which grew most slowly, in terms of real GDP per person, over the last 100 years?
|a. |Brazil |
|b. |Mexico |
|c. |China |
|d. |United States |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

17. In the length of one generation, which of the following countries has gone from being among the poorest countries in the world to being among the richest?
|a. |Chad |
|b. |Ethiopia |
|c. |India |
|d. |South Korea |

ANS: D DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

18. Average income has been stagnant for many years in
|a. |Ireland. |
|b. |Singapore. |
|c. |Ethiopia. |
|d. |All of the above are correct. |

ANS: C DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

19. Which list contains, in this order, a country whose real GDP per person grew faster and one whose real GDP per person grew slower than real GDP per person in the U.S. over the last 100 years?
|a. |China, Pakistan |
|b. |United Kingdom, China |
|c. |Pakistan, Argentina |
|d. |Argentina, Japan |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

20. Countries that have lower levels of real GDP per person than the United States
|a. |tend to have growth rates that are higher than that of the United States. |
|b. |tend to have growth rates that are about the same as that of the United States. |
|c. |tend to have growth rates that are lower than that of the United States. |
|d. |in some cases have growth rates that are higher than that of the United States and in other cases lower than that of the|
| |United States. |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

21. Which of the following is correct?
|a. |Over the last 100 years Japan had a higher average growth rate than the United States. It follows that, today, the |
| |standard of living in Japan is higher than in the United States. |
|b. |The typical person in Bangladesh today has about twice the real income of a typical American 100 years ago. |
|c. |The typical citizen of China today has about one-half as much real income as the typical citizen of America today. |
|d. |None of the above is correct. |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

22. Which of the following does the level of real GDP measure?
|a. |total real income |
|b. |productivity |
|c. |the standard of living |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Real GDP
MSC: Definitional

23. Which of the following is correct?
|a. |Countries with the highest growth rates over the last 100 years are the ones that had the highest level of real GDP 100 |
| |years ago. |
|b. |Most countries have had little fluctuation around their average growth rates during the past 100 years. |
|c. |The ranking of countries by income changes substantially over time. |
|d. |Over the last 100 years, Japan had the highest real GDP growth rate, and now has the highest real GDP per person. |

ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

24. Over the last 100 years which of the following had growth rates higher than that of the United States?
|a. |the United Kingdom |
|b. |Bangladesh |
|c. |Brazil |
|d. |None of the above is correct. |

ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

25. Which of the following nations experienced average rates of economic growth of less than 2 percent over the last 100 years?
|a. |Bangladesh |
|b. |Pakistan |
|c. |United Kingdom |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

26. In 1870, the richest country in the world was
|a. |the United States. |
|b. |Spain. |
|c. |the United Kingdom. |
|d. |Germany. |

ANS: C DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

27. Which of the following countries had the highest level of real GDP per person in 2006?
|a. |Germany |
|b. |United Kingdom |
|c. |United States |
|d. |Japan |

ANS: C DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

28. Which of the following countries had the lowest level of real GDP per person in 2006?
|a. |Pakistan |
|b. |Indonesia |
|c. |Mexico |
|d. |China |

ANS: A DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Standard of living
MSC: Definitional

29. Which of the following pairs of countries experienced approximately the same rate of growth of real income per person over the last 100 or so years?
|a. |Germany and Japan |
|b. |Indonesia and the United Kingdom |
|c. |the United States and Japan |
|d. |Mexico and Pakistan |

ANS: B DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

30. Last year real GDP per person in the imaginary nation of Olympus was 4,500. The year before it was 4,250. By about what percentage did Olympian real GDP per person grow during the period?
|a. |4.6 percent |
|b. |5.2 percent |
|c. |5.9 percent |
|d. |6.5 percent |

ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

31. Last year real GDP in the imaginary nation of Oceania was 561.0 billion and the population was 2.2 million. The year before, real GDP was 500.0 billion and the population was 2.0 million. What was the growth rate of real GDP per person during the year?
|a. |12 percent |
|b. |10 percent |
|c. |4 percent |
|d. |2 percent |

ANS: D DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

32. In 2006 real GDP in the imaginary nation of Populia was 750 billion and the population was 3 million. In 2007 real GDP was 907.5 billion and the population was 3.3 million. What was the growth rate of real GDP per person during the year?
|a. |10 percent |
|b. |14 percent |
|c. |17 percent |
|d. |21 percent |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

33. In 2007, the imaginary nation of Freedonia had a population of 2,700 and real GDP of 16,200,000. In 2008 it had a population of 2,500 and real GDP of 14,640,000. What was the growth rate of real GDP per person in Freedonia between 2007 and 2008?
|a. |-2.4 percent |
|b. |-0.7 percent |
|c. |4.4 percent |
|d. |5.2 percent |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

34. In 2006, the imaginary nation of Viloxia had a population of 5,000 and real GDP of 500,000. In 2007 it had a population of 5,100 and real GDP of 520,200. Over the year in question, real GDP per person in Viloxia grew by
|a. |2 percent, which is high compared to average U.S. growth over the last one-hundred years. |
|b. |2 percent, which is about the same as average U.S. growth over the last one-hundred years. |
|c. |4 percent, which is high compared to average U.S. growth over the last one-hundred years. |
|d. |4 percent, which is about the same as average U.S. growth over the last one-hundred years. |

ANS: B DIF: 3 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

35. Last year Panglossia had real GDP of 27.0 billion. This year it had real GDP of 31.5 billion. Which of the following changes in population is consistent with a 5 percent growth rate of real GDP per person over the last year?
|a. |The population decreased from 88 million to 84 million. |
|b. |The population decreased from 75 million to 73 million. |
|c. |The population increased from 45 million to 50 million. |
|d. |The population increased from 60 million to 62 million. |

ANS: C DIF: 3 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Analytical

36. Which of the following is indicated by the data on real income per person for various countries over the past 100 or so years?
|a. |If, in a relatively poor country, real income per person had grown by 3.5 percent per year for the last 100 years, it |
| |would be a relatively rich country today. |
|b. |Rich countries became richer and poor countries became poorer. |
|c. |In the United States, real income per person today is about four times as high as it was 100 years ago. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

37. Which of the following is not correct?
|a. |Across countries there are large differences in the average income per person. These differences are reflected in large|
| |differences in the quality of life. |
|b. |With a growth rate of about 2 percent per year, average income per person doubles about every 35 years. |
|c. |The ranking of countries by average income changes very little over time. |
|d. |In some countries real income per person has changed very little over many years. |

ANS: C DIF: 2 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Income | Economic growth
MSC: Interpretive

Sec02 - Production and Growth - Productivity: Its Role and Determinants

MULTIPLE CHOICE

1. The one variable that stands out as the most significant explanation of large variations in living standards around the world is
|a. |productivity. |
|b. |population. |
|c. |preferences. |
|d. |prices. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive

2. In determining living standards, productivity plays a key role
|a. |for individuals, but not for nations. |
|b. |for nations, but not for individuals. |
|c. |for both nations and individuals. |
|d. |for neither nations nor individuals. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Standard of living | Productivity MSC: Interpretive

3. The quantity of goods and services produced from each unit of labor input is called
|a. |standard of living. |
|b. |productivity. |
|c. |capitalized quantity. |
|d. |the knowledge base. |

ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Definitional

4. Productivity is defined as
|a. |the amount of difficulty that is involved in producing a given quantity of goods and services. |
|b. |the quantity of labor that is required to produce one unit of goods and services. |
|c. |the quantity of goods and services produced from each unit of labor input. |
|d. |the quantity of goods and services produced over a given amount of time. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Definitional

5. Which of the following is correct?
|a. |Although levels of real GDP per person vary substantially from country to country, the growth rate of real GDP per |
| |person is similar across countries. |
|b. |Productivity is not closely linked to government policies. |
|c. |The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a|
| |good gauge of economic progress. |
|d. |Productivity may be measured by the growth rate of real GDP per person. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

6. Perry accumulated a lot of mathematical skills while in high school, college, and graduate school. Economists include these skills as part of Perry’s
|a. |standard of learning. |
|b. |technological knowledge. |
|c. |physical capital. |
|d. |human capital. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Human capital
MSC: Definitional

7. What term do economists use to describe the relationship between the quantity of inputs used and the quantity of output produced?
|a. |production function |
|b. |input function |
|c. |capital function |
|d. |returns to scale |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Production function MSC: Definitional

8. Which of the following items plays a role in determining productivity?
|a. |physical capital |
|b. |natural resources |
|c. |technological knowledge |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Interpretive

9. Technological knowledge
|a. |is the same thing as human capital. |
|b. |can be discovered but it can never be kept secret. |
|c. |is a determinant of productivity. |
|d. |does not play a role in the relationship that economists call the production function. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Technology
MSC: Interpretive

10. Industrial machinery is an example of
|a. |a factor of production that in the past was an output from the production process. |
|b. |technological knowledge. |
|c. |a production function. |
|d. |an item which always has the property called constant returns to scale. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Interpretive

11. Industrial machinery is an example of
|a. |a factor of production that in the past was an output from the production process. |
|b. |physical capital. |
|c. |something that influences productivity. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital | Productivity MSC: Interpretive

12. Which of the following statements about inputs is correct?
|a. |A forest is an example of a natural resource; it is also an example of a renewable resource. |
|b. |There is no distinction between human capital and technological knowledge. |
|c. |Human capital is a non-produced factor of production. |
|d. |Physical capital is a non-produced factor of production. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Inputs
MSC: Interpretive

13. Despite its status as one of the richest countries in the world, Japan
|a. |has a very low level of productivity. |
|b. |has few natural resources. |
|c. |has very little human capital. |
|d. |engages in a relatively small amount of international trade. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Natural resources
MSC: Interpretive

14. The notion that our ability to conserve natural resources is growing more rapidly than their supplies are dwindling is supported by the fact that
|a. |most economists do not regard the availability of natural resources as a determinant of productivity. |
|b. |the quantity of natural resources does not enter into any production function. |
|c. |inflation-adjusted prices of natural resources are stable or falling over time. |
|d. |inflation-adjusted prices of natural resources are rising over time. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Natural resources
MSC: Interpretive

15. Which of the following statements is correct?
|a. |By definition, all natural resources are nonrenewable. |
|b. |Market prices give us reason to believe that natural resources are a limit to economic growth. |
|c. |An economy must be blessed with ample quantities of natural resources if it is to be a highly productive economy. |
|d. |Differences in natural resources can explain some of the differences in standards of living around the world. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Natural resources
MSC: Interpretive

16. The average amount of goods and services produced from each hour of a worker's time is called
|a. |GDP. |
|b. |per capita GDP. |
|c. |productivity. |
|d. |technological knowledge. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Definitional

17. For a given year, productivity in a particular country is most closely matched with that country's
|a. |level of real GDP over that year. |
|b. |level of real GDP divided by hours worked over that year. |
|c. |growth rate of real GDP divided by hours worked over that year. |
|d. |growth rate of real GDP per person over that year. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity | Real GDP
MSC: Interpretive

18. Productivity
|a. |is nearly the same across countries, and so provides no help explaining differences in the standard of living across |
| |countries. |
|b. |explains very little of the differences in the standard of living across countries. |
|c. |explains some, but not most of the differences in the standard of living across countries. |
|d. |explains most of the differences in the standard of living across countries. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Interpretive

19. Which of the following is a correct way to measure productivity?
|a. |Divide the number of hours worked by the quantity of output. |
|b. |Divide the quantity of output by the number of hours worked. |
|c. |Divide the quantity of output by the quantity of physical capital. |
|d. |Divide the change in the quantity of output by the change in the number of hours worked. |

ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Definitional

20. Cedar Valley Furniture uses 5 workers, each working 8 hours, to produce 80 rocking chairs. What is the productivity of these workers?
|a. |2 chairs per hour |
|b. |10 chairs per hour |
|c. |1 hour per chair |
|d. |80 chairs |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

21. In one day Alpha Cabinet Company made 40 cabinets with 320 hours of labor. What was their productivity?
|a. |1/8 cabinet per hour |
|b. |8 hours per cabinet |
|c. |40 cabinets |
|d. |None of the above is correct. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

22. You and your friend work together for 4 hours to produce a total of 12 futons. What is productivity?
|a. |12 futons |
|b. |24 futons |
|c. |3 futons per hour of labor |
|d. |1.5 futons per hour of labor |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

23. A barber shop produces 96 haircuts a day. Each barber in the shop works 8 hours per day and produces the same number of haircuts per hour. If the shop’s productivity is 3 haircuts per hour of labor, then how many barbers does the shop employ?
|a. |2 |
|b. |3 |
|c. |4 |
|d. |6 |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

24. Nathan owns a bakery that bakes only cakes. All of his bakers work 8 hours per day. In 2006, he employed 5 bakers and they produced 200 cakes each day. In 2007, he employed 6 bakers and they produced 249 cakes each day. In Nathan’s bakery, productivity
|a. |decreased by 2.33 percent between 2006 and 2007. |
|b. |increased by 2.33 percent between 2006 and 2007. |
|c. |increased by 3.75 percent between 2006 and 2007. |
|d. |increased by 24.50 percent between 2006 and 2007. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

25. In 2007, Modern Electronics, Inc. produced 60,000 calculators, employing 80 workers, each of whom worked 8 hours per day. In 2008, the same firm produced 76,500 calculators, employing 85 workers, each of whom worked 10 hours per day. Between 2007 and 2008, productivity at Modern Electronics
|a. |decreased by 4.00 percent. |
|b. |remained constant. |
|c. |increased by 8.33 percent. |
|d. |increased by 27.50 percent. |

ANS: A DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

26. Consider two countries. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000, of whom 1,800 work 6 hours a day to make 270,000 final goods.
|a. |Country A has higher productivity and higher real GDP per person than country B. |
|b. |Country A has lower productivity and lower real GDP per person than country B. |
|c. |Country A has higher productivity, but lower real GDP per person than country B. |
|d. |Country B has lower productivity, but higher real GDP per person than country B. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity | Real GDP
MSC: Applicative

27. Workland has a population of 10,000, of whom 7,000 work 8 hours a day to produce a total of 224,000 final goods. Laborland has a population of 5,000, of whom 4,000 work 12 hours a day to produce a total of 120,000 final goods.
|a. |Workland has higher productivity and higher real GDP per person than Laborland. |
|b. |Workland has higher productivity but lower real GDP per person than Laborland. |
|c. |Workland has lower productivity but higher real GDP per person than Laborland. |
|d. |Workland has lower productivity and lower real GDP per person than Laborland. |

ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity | Real GDP
MSC: Applicative

28. Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours a day and had productivity of 3.0. The country with the higher real GDP was
|a. |country A, and the country with higher real GDP per person was country A. |
|b. |country A, and the country with higher real GDP per person was country B. |
|c. |country B, and the country with higher real GDP per person was country A. |
|d. |country B, and the country with higher real GDP per person was country B. |

ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity | Real GDP
MSC: Analytical

29. Last year a country had 800 workers who worked an average of 8 hours and produced 12,800 units. This year the country had 1000 workers who worked an average of 8 hours and produced 14,000 units. This country’s productivity was
|a. |higher this year than last year. A possible source of this change in productivity is a change in the size of the |
| |capital stock. |
|b. |higher this year than last year. A change in the size of the capital stock does not affect productivity. |
|c. |lower this year than last year. A possible source of this change in productivity is a change in the size of the capital|
| |stock. |
|d. |lower this year than last year. A change in the size of the capital stock does not affect productivity. |

ANS: C DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

30. Which of the following statements is true?
|a. |Productivity is calculated as hours worked divided by output produced. |
|b. |Americans have a higher standard of living than Indonesians because American workers are more productive than Indonesian|
| |workers. |
|c. |Trends in the market prices of most resources indicate that they have become increasingly scarce over time. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Interpretive

31. Which of the following is not correct?
|a. |Countries that have had higher output growth per person have typically done so without higher productivity growth. |
|b. |A country's standard of living and its productivity are closely related. |
|c. |Productivity refers to output produced per hour of work. |
|d. |Increases in productivity can be used to increase output or leisure. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Interpretive

32. Productivity is the
|a. |key determinant of living standards, and growth in productivity is the key determinant of growth in living standards. |
|b. |key determinant of living standards, but growth in productivity is not the key determinant of growth in living |
| |standards. |
|c. |not the key determinant of living standards, but growth in productivity is the key determinant of growth in living |
| |standards. |
|d. |not the key determinant of living standards, and growth in productivity is not the key determinant of growth in living |
| |standards. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive

33. Both Tom and Jerry work 10 hours a day. Tom can produce six baskets of goods per hour while Jerry can produce four baskets of the same goods per hour. It follows that Tom's
|a. |productivity is greater than Jerry's. |
|b. |output is greater than Jerry's. |
|c. |standard of living is higher than Jerry's. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive

34. Waldo works eight hours and produces 7 units of goods per hour. Emerson works six hours and produces 10 units of goods per hour.
|a. |Waldo’s productivity and output are greater than Emerson’s. |
|b. |Waldo’s productivity is greater than Emerson’s but his output is less. |
|c. |Emerson’s productivity and output are greater than Waldo’s. |
|d. |Emerson’s productivity is greater than Waldo’s but his output is less. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

35. In 8 hours, Sonja produces 8 units of goods and services. In 10 hours, Emma produces 9 units of goods and services. It follows that
|a. |Sonja’s productivity is higher than Emma’s. |
|b. |Emma’s productivity is higher than Sonja’s. |
|c. |Emma’s income per hour will be higher than Sonja’s. |
|d. |Sonja’s income per day will be higher than Emma’s. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

36. Mary looks over reports on four of her workers. Jack made 25 baskets in 5 hours. Walter made 36 baskets in 6 hours. Rudy made 40 baskets in 10 hours. Sam made 22 baskets in four hours. Who has the greatest productivity?
|a. |Jack |
|b. |Walter |
|c. |Rudy |
|d. |Sam |

ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

37. Real Foods produced 400,000 cans of diced tomatoes in 2007 and 460,000 cans of diced tomatoes in 2008. They employed the same number of labor hours each year. Relative to their productivity in 2007, their productivity in 2008 was
|a. |6 percent lower. |
|b. |unchanged. |
|c. |6 percent higher. |
|d. |15 percent higher. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

38. In 2007, Angel Foods produced 300,000 bags of tortilla chips, employing 12,000 hours of labor. In 2008, Angel Foods produced 325,000 bags of tortilla chips, employing 13,000 hours of labor. Relative to their productivity in 2007, their productivity in 2008
|a. |decreased by 2.1 percent. |
|b. |was unchanged. |
|c. |increased by 1.3 percent. |
|d. |increased by 2.3 percent. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

39. Dilbert’s Incorporated produced 5,000,000 units of accounting software in 2004. At the start of 2005 the pointy-haired boss reduced total annual hours of employment from 10,000 to 8,000 and production was 4,800,000. These numbers indicate that productivity
|a. |fell by 4%. |
|b. |fell by 20%. |
|c. |rose by 12%. |
|d. |rose by 20%. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

40. Dilbert’s Incorporated produced 6,000,000 units of software in 2005. At the start of 2006 the pointy-haired boss raised employment from 10,000 total annual hours to 14,000 annual hours and production was 7,000,000 units. Based on these numbers what happened to productivity?
|a. |It fell by about 16.7%. |
|b. |It stayed the same. |
|c. |It rose by about 16.7%. |
|d. |It rose by about 40%. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Applicative

41. The key determinant of a the standard of living in a country is
|a. |the amount of goods and services produced from each hour of a worker's time. |
|b. |the total amount of goods and services produced within the country. |
|c. |the total amount of its physical capital. |
|d. |its growth rate of real GDP. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Standard of living | Productivity MSC: Interpretive

42. Which of the following is a determinant of productivity?
|a. |human capital per worker |
|b. |physical capital per worker |
|c. |natural resources per worker |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Interpretive

43. The inputs used to produce goods and services are also called
|a. |productivity indicators. |
|b. |capitalization producers. |
|c. |production functions. |
|d. |factors of production. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Factors of production MSC: Definitional

44. The Peapod Restaurant uses all of the following to produce vegetarian meals. Which of them is an example of physical capital?
|a. |the owner's knowledge of how to prepare vegetarian entrees |
|b. |the money in the owner's account at the bank from which she borrowed money |
|c. |the tables and chairs in the restaurant |
|d. |the land the restaurant was built on |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

45. The equipment and structures available to produce goods and services are called
|a. |physical capital. |
|b. |human capital. |
|c. |the production function. |
|d. |technology. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

46. The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce furniture are called
|a. |human capital. |
|b. |physical capital. |
|c. |natural resources. |
|d. |technological knowledge. |

ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

47. Which of the following would not be considered physical capital?
|a. |a new factory building |
|b. |a computer used to help Mercury Delivery Service keep track of its orders |
|c. |on-the-job training |
|d. |a desk used in an accountant's office |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

48. Which of the following is physical capital?
|a. |the strength of workers |
|b. |the knowledge of workers |
|c. |financial assets like cash and bonds |
|d. |the equipment in a factory |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

49. Which of the following would be considered physical capital?
|a. |the refrigerators at Uncle Bob’s restaurant |
|b. |rivers on which goods are transported |
|c. |the skills and knowledge of a lawyer |
|d. |All of the above are correct. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

50. Which of the following terms do we use to mean the same thing as physical capital?
|a. |assembly line |
|b. |manual labor |
|c. |capital |
|d. |factor of production |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Physical capital MSC: Definitional

51. Human capital is the
|a. |knowledge and skills that workers acquire through education, training, and experience. |
|b. |stock of equipment and structures that is used to produce goods and services. |
|c. |total number of hours worked in an economy. |
|d. |same thing as technological knowledge. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional

52. Which of the following is considered human capital?
|a. |knowledge acquired from early childhood education programs |
|b. |knowledge acquired from grade school |
|c. |knowledge acquired from on-the-job training |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional

53. Which of the following is human capital?
|a. |a student loan |
|b. |understanding how to use a company's accounting software |
|c. |training videos for new corporate employees |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional

54. Which of the following is considered human capital?
|a. |the comfortable chair in your dorm room where you read economics texts |
|b. |the amount you get paid each week to work at the library |
|c. |the things you have learned this semester |
|d. |any capital goods that require a human to be present to operate |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional

55. Which of the following best illustrates the human capital of a survivor stranded on an island?
|a. |the fishing poles she has produced |
|b. |the invention of a better fishing lure |
|c. |the fresh fruit and fish on and around the island |
|d. |her previous training in a survival course |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Interpretive

56. Which of the following is a part of your economics professor's human capital?
|a. |the things she learned at some prestigious university |
|b. |her copy of Mankiw's text |
|c. |her chalk holder |
|d. |All of the above are correct. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional

57. Which of the following is human capital?
|a. |textbooks |
|b. |hand held power tools |
|c. |understanding how to repair cars |
|d. |All of the above are correct. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital MSC: Definitional

58. Which of the following would be human capital and physical capital, respectively?
|a. |for an accounting firm, the accountants’ knowledge of tax laws and computer software |
|b. |for a grocery store, grocery carts and shelving |
|c. |for a school, chalkboard and desks |
|d. |for a library, the building and the reference librarians’ knowledge of the Internet |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital | Physical capital MSC: Definitional

59. Which of the following would be human capital and physical capital, respectively?
|a. |for an accounting firm, the accountants’ knowledge of tax laws and the number of hours worked by those accountants |
|b. |for a grocery store, grocery carts and cash registers. |
|c. |for a restaurant, the chefs’ knowledge about preparing food and equipment in the kitchen |
|d. |for a library, the building and the reference librarians’ knowledge of the Internet |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Human capital | Physical capital MSC: Definitional

60. Natural resources
|a. |are inputs provided by nature. |
|b. |are inputs such as land, rivers, and mineral deposits. |
|c. |take two forms: renewable and nonrenewable. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources MSC: Definitional

61. The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called
|a. |physical capital. |
|b. |natural resources. |
|c. |human capital. |
|d. |technological knowledge. |

ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources MSC: Definitional

62. Which of the following lists contains, in this order, natural resources, human capital, and physical capital?
|a. |For a restaurant: the land the restaurant was built on, the things the Chef learned at Cooking School, the freezers |
| |where the chops and steaks are kept. |
|b. |For a furniture company: wood, the company cafeteria, saws. |
|c. |For a railroad: fuel, railroad engines, railroad tracks. |
|d. |None of the above is correct. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources | Physical capital | Human capital MSC: Definitional

63. Which of the following is an example of a nonrenewable resource?
|a. |coal |
|b. |honey |
|c. |livestock |
|d. |All of the above are correct. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources MSC: Definitional

64. Which of the following is an example of a renewable natural resource?
|a. |the knowledge possessed by scientists |
|b. |carpenters’ labor services |
|c. |lumber |
|d. |All of the above are correct. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources MSC: Definitional

65. Which of the following is an example of a renewable natural resource?
|a. |fish |
|b. |soybeans |
|c. |wood |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Natural resources MSC: Definitional

66. In a market economy, scarcity of resources is most clearly reflected in
|a. |supply. |
|b. |demand. |
|c. |market prices. |
|d. |the stock of the resource. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Scarcity MSC: Definitional

67. In a market economy, we know that a resource has become scarcer when
|a. |its price rises relative to other prices. |
|b. |it is non-renewable and some of it is used. |
|c. |people search for substitutes. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Scarcity MSC: Interpretive

68. In a market economy, we know that a resource has become scarcer when
|a. |both the demand for the good and the supply of the good have increased. |
|b. |both the demand for the good and the supply of the good have decreased. |
|c. |the demand for the good has increased and the supply has decreased. |
|d. |the demand for the good has decreased and the supply has remained constant. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Scarcity MSC: Interpretive

69. If the price of a good has risen over time,
|a. |it must have become more scarce. |
|b. |it must have become less scarce. |
|c. |it has become more scarce only if the price adjusted for inflation has risen. |
|d. |it has become less scarce only if the price adjusted for inflation has risen. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Scarcity MSC: Interpretive

70. In a market economy, the real, or inflation-adjusted, price of a resource measures its
|a. |contribution to revenue. |
|b. |relative scarcity. |
|c. |productivity. |
|d. |contribution to efficiency. |

ANS: B DIF: 1 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Definitional

71. Greater scarcity of a natural resource is indicated
|a. |by an increase in the price of the resource, whether the price increase is less than or greater than the rate of |
| |inflation. |
|b. |only by an increase in the price of the resource that is less than the rate of inflation. |
|c. |only by an increase in the price of the resource that is greater than the rate of inflation. |
|d. |only by an increase in the price of the resource that is caused by a decrease in supply and is greater than the rate of |
| |inflation. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Interpretive

72. Historically, the market prices of most natural resources (adjusted for inflation) have
|a. |increased. |
|b. |remained stable. |
|c. |remained stable or decreased. |
|d. |decreased. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Definitional

73. The behavior of market prices over time indicates that natural resources
|a. |are a limit to economic growth. |
|b. |are unrelated to economic growth. |
|c. |are not a limit to economic growth. |
|d. |are the major determinant of productivity. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Natural resources | Economic growth MSC: Interpretive

74. Which of the following statements is true?
|a. |Natural resources per worker influence productivity only when those natural resources are renewable. |
|b. |The prices of most natural resources are stable or falling relative to other prices. |
|c. |Technology requires greater use of natural resources. |
|d. |The terms human capital and technological knowledge are used interchangeably. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Interpretive

75. Which of the following statements is true?
|a. |The quantity of natural resources per worker can influence productivity. |
|b. |Technological knowledge and human capital are closely related. |
|c. |Over long periods of time, the prices of most natural resources are stable or falling, relative to other prices. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources | Productivity MSC: Interpretive

76. If natural resources had become scarcer, then we would expect their
|a. |prices to have risen more than inflation as they have. |
|b. |prices to have risen more than inflation, but they have not. |
|c. |known quantities to have fallen as they have. |
|d. |known quantities to have fallen but they have not. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Interpretive

77. If an inexpensive alternative to oil were found, the price of oil adjusted for inflation
|a. |would decline as the alternative would reduce the demand for oil. |
|b. |would decline as the alternative would reduce the supply of oil. |
|c. |would increase as the alternative would increase the demand for oil. |
|d. |would increase as the alternative would increase the supply of oil. |

ANS: A DIF: 3 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Applicative

78. A leading environmental group recently published a report contending that humans are running a "resource deficit" because we are using natural resources faster than they can be regenerated. The group claims that this means that economic growth will eventually stop, and will even be reversed. An economist would
|a. |agree with the report, and would point to rising natural resource prices as evidence. |
|b. |agree with the report, but wouldn't think it was important because growth will not slow down for several centuries. |
|c. |disagree with the report, in part because it ignores the mitigating effects of technological change. |
|d. |disagree with the report because labor and capital are the primary determinants of growth, and since they are plentiful,|
| |growth will not slow down. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources MSC: Interpretive

79. If a good has become more scarce, then we know for sure that
|a. |the demand for it increased. |
|b. |the supply of it decreased. |
|c. |either the demand for it increased or the supply of it decreased. |
|d. |both the supply of it and the demand for it decreased. |

ANS: C DIF: 3 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Scarcity MSC: Interpretive

80. Which of the following best states economists' understanding of the facts concerning the relationship between natural resources and economic growth?
|a. |A country with no or few domestic natural resources is destined to be poor. |
|b. |Differences in natural resources have virtually no role in explaining differences in standards of living. |
|c. |Some countries can be rich mostly because of their natural resources and countries without natural resources need not be|
| |poor, but can never have very high standards of living. |
|d. |Abundant domestic natural resources may help make a country rich, but even countries with few natural resources can have|
| |high standards of living. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Natural resources | Economic growth MSC: Interpretive

81. In the country of Suchnott, the price of silver increased from $30 per ounce to $32 per ounce during a time when the overall price level increased by 5 percent. During this period, the real price of silver
|a. |increased. |
|b. |decreased. |
|c. |stayed the same. |
|d. |might have increased, decreased or stayed the same; more information is needed to be sure. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Prices MSC: Applicative

82. Suppose over the last year that the price of recycled aluminum increased from $800 a ton to $900 a ton. Over the same time a measure of the overall price level increased from 120 to 130. The price of recycled aluminum increased by
|a. |less than inflation, but this doesn’t necessarily mean it became scarcer. |
|b. |less than inflation, and this means it became scarcer. |
|c. |more than inflation, and this means it became scarcer. |
|d. |more than inflation, but this doesn’t necessarily mean that it become scarcer. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Prices | Scarcity MSC: Applicative

83. Suppose over the last year that the price of iron ore increased from $1,200 a ton to $1,300 a ton. Over the same time a measure of the overall price level increased from 168 to 187. The price of iron ore increased by
|a. |less than inflation, and this means it became relatively less scarce. |
|b. |less than inflation, and this means it became scarcer. |
|c. |more than inflation, and this means it became scarcer. |
|d. |more than inflation, but this doesn’t necessarily mean that it become scarcer. |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Prices | Scarcity MSC: Applicative

84. After adjusting for inflation, over time the prices of most natural resources have been
|a. |steady or falling, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling. |
|b. |steady or falling, meaning that their supplies are dwindling more rapidly than our ability to conserve them is growing. |
|c. |rising, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling. |
|d. |rising, meaning that their supplies are dwindling more rapidly than our ability to conserve them is growing. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost
TOP: Natural resources | Prices MSC: Interpretive

85. Proprietary technology is knowledge that is
|a. |known but no longer used much. |
|b. |known, but only recently discovered. |
|c. |known mostly by only those in a certain profession. |
|d. |known only by the company that discovered it. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Definitional

86. Proprietary technology is technology that is
|a. |widely used because it is easy to learn. |
|b. |widely used because the government subsidizes its use. |
|c. |not widely used because people could, but have not, taken the time to learn how to apply it. |
|d. |not widely used because it is known or controlled only by the company that discovered it. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Definitional

87. A management professor discovers a way for corporate management to operate more efficiently. He publishes his findings in a journal. His findings are
|a. |proprietary and common knowledge. |
|b. |neither proprietary nor common knowledge. |
|c. |proprietary, but not common, knowledge. |
|d. |common, but not proprietary, knowledge. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Definitional

88. Your company discovers a better way to produce mousetraps, but your better methods are not apparent from the mousetraps themselves. Your knowledge of how to more efficiently produce mousetraps is
|a. |common technological knowledge. |
|b. |common, but not technological, knowledge. |
|c. |proprietary technological knowledge. |
|d. |proprietary, but not technological, knowledge. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Definitional

89. Technological knowledge refers to
|a. |human capital. |
|b. |available information on how to produce things. |
|c. |resources expended transmitting society's understanding to the labor force. |
|d. |All of the above are technological knowledge. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Interpretive

90. Thomas Edison received patents on many of his inventions. While the patents existed, his ideas were
|a. |public goods and proprietary knowledge. |
|b. |public goods but not proprietary knowledge. |
|c. |private goods and proprietary knowledge. |
|d. |private goods but not proprietary knowledge. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Interpretive

91. The relationship between the quantity of output created and the quantity of inputs needed to create it is called
|a. |the capital accumulation function. |
|b. |technological knowledge. |
|c. |the production function. |
|d. |human capital. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Production function MSC: Definitional

92. An understanding of the best ways to produce goods and services is called
|a. |human capital. |
|b. |physical capital. |
|c. |technology. |
|d. |productivity. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Technology MSC: Definitional

93. Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the population of both countries was unchanged.
|a. |It follows that real GDP per person must be higher in Oceania than in Freedonia. |
|b. |It follows that real GDP per person grew faster in Oceania than in Freedonia. |
|c. |It follows that the standard of living must be higher in Oceania than in Freedonia. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity | Real GDP
MSC: Applicative

94. Suppose that real GDP grew more in Country A than in Country B last year.
|a. |Country A must have a higher standard of living than country B. |
|b. |Country A's productivity must have grown faster than country B's. |
|c. |Both of the above are correct. |
|d. |None of the above is correct. |

ANS: D DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Analytical

95. Which of the following would increase productivity?
|a. |an increase in the physical capital stock per worker |
|b. |an increase in human capital per worker |
|c. |an increase in natural resources per worker |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Interpretive

96. Which of the following would, by itself, reveal the most about a country’s standard of living?
|a. |its level of capital |
|b. |the number of hours worked |
|c. |its availability of natural resources |
|d. |its productivity |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Standard of living MSC: Interpretive

97. Human capital is
|a. |the same thing as technological knowledge. |
|b. |the same thing as labor. |
|c. |the tools and equipment operated by humans. |
|d. |knowledge and skills that workers have acquired. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Human capital
MSC: Definitional

98. Suppose a country imposes new restrictions on how many hours people can work. If these restrictions reduce the total number of hours worked in the economy, but all other factors that determine output are held fixed, then
|a. |productivity and output both rise. |
|b. |productivity rises and output falls. |
|c. |productivity falls and output rises. |
|d. |productivity and output fall. |

ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Productivity
MSC: Analytical

99. Which of the following would be considered physical capital?
|a. |the available knowledge on how to make semiconductors |
|b. |a taxi-cab driver’s knowledge of the fastest routes to take |
|c. |bulldozers, backhoes and other construction equipment |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Physical capital
MSC: Interpretive

100. Other things the same, which of the following could explain an increase in productivity?
|a. |either an increase in human capital or an increase in physical capital |
|b. |an increase in human capital but not an increase in physical capital |
|c. |an increase in physical capital but not an increase in human capital |
|d. |neither an increase in human capital nor an increase in physical capital |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Human capital | Physical capital MSC: Interpretive

101. Which of the following is correct?
|a. |Once adjustment is made for inflation, the prices of most natural resources have been about steady or falling. |
|b. |Technological progress has allowed us to substitute renewable resources for some nonrenewable resources. |
|c. |Technological progress has made once-crucial natural resources less necessary. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Natural resources
MSC: Interpretive

102. Given that a country’s real output has increased, in which of the following cases can we be sure that its productivity also has increased?
|a. |The total number of hours worked rose. |
|b. |The total number of hours worked stayed the same. |
|c. |The total number of hours worked fell. |
|d. |Both b and c are correct. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and Growth TOP: Output | Productivity
MSC: Interpretive

103. Using the notation and production function in the text, Y/L is
|a. |productivity. |
|b. |output. |
|c. |the availability of natural resources. |
|d. |the amount of human capital. |

ANS: A DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Productivity MSC: Interpretive

104. Using the production function and notation in the text, H/L measures
|a. |natural resources per worker. |
|b. |human capital per worker. |
|c. |output per worker. |
|d. |physical capital per worker. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Production function MSC: Interpretive

105. In a particular production process, if the quantities of all inputs used are increased by 60 percent, then the quantity of output increases by 60 percent as well. This means that
|a. |the production process cannot be enhanced by technological advances. |
|b. |no mathematical representation of the relevant production function can be formulated. |
|c. |the relevant production function has the limits-to-growth property. |
|d. |the relevant production function has the constant-returns-to-scale property. |

ANS: D DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Interpretive

106. If your firm’s production function has constant returns to scale, and if you doubled all your inputs, then your firm's output would
|a. |not change. |
|b. |increase, but by less than double. |
|c. |double. |
|d. |more than double. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Constant returns to scale MSC: Definitional

107. You bake cookies. One day you double the time you spend, double the number of chocolate chips, flour, eggs, and all your other inputs, and bake twice as many cookies. Your cookie production function has
|a. |decreasing returns to scale. |
|b. |zero returns to scale. |
|c. |constant returns to scale. |
|d. |increasing returns to scale. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Production function | Constant returns to scale MSC: Interpretive

108. If there are constant returns to scale, the production function can be written as
|a. |xY = 2xAF(L, K, H, N). |
|b. |Y/L = A F(xL, xK, xH, xN). |
|c. |Y/L = A F( 1, K/L, H/L, N/L). |
|d. |L = AF(Y, K, H, N). |

ANS: C DIF: 2 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Constant returns to scale MSC: Interpretive

109. If a production function has constant returns to scale, output can be doubled if
|a. |labor alone doubles. |
|b. |all inputs but labor double. |
|c. |all of the inputs double. |
|d. |None of the above is correct. |

ANS: C DIF: 1 REF: 25-2
NAT: Analytic LOC: The Study of economics, and definitions of economics
TOP: Constant returns to scale MSC: Interpretive

110. Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital, and its human capital, but its technology is unchanged. Which of the following would double?
|a. |both output and productivity |
|b. |output, but not productivity |
|c. |productivity, but not output |
|d. |neither productivity nor output |

ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Analytical

111. An economy’s production function has the constant-returns-to-scale property. If the economy’s labor force doubled and all other inputs stayed the same, then real GDP would
|a. |stay the same. |
|b. |increase by exactly 50 percent. |
|c. |increase by exactly 100 percent. |
|d. |increase, but not necessarily by either 50 percent or 100 percent. |

ANS: D DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Constant returns to scale | Real GDP MSC: Analytical

112. If the number of workers in an economy doubled, all other inputs stayed the same, and there were constant returns to scale, productivity would
|a. |fall to less than one-half of its former value. |
|b. |fall, but it would still be greater than one-half of its former value. |
|c. |stay the same. |
|d. |rise but less than double. |

ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Constant returns to scale | Productivity MSC: Analytical

113. If an economy with constant returns to scale were to double its physical capital stock, its available natural resources, and its human capital, but leave the size of the labor force the same,
|a. |its output would stay the same and so would its productivity. |
|b. |its output and productivity would increase, but less than double. |
|c. |its output and productivity would increase by more than double. |
|d. |None of the above is correct. |

ANS: B DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Productivity MSC: Analytical

Scenario 25-1. An economy’s production form takes the form Y = AF(L, K, H, N).

114. Refer to Scenario 25-1. Using the notation in the text, K represents the quantity of
|a. |human capital only. |
|b. |physical capital only. |
|c. |human capital and physical capital combined. |
|d. |nonrenewable natural resources. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Production function
MSC: Interpretive

115. Refer to Scenario 25-1. In the production function, which variable would increase in value as technology improved?
|a. |A |
|b. |K |
|c. |H |
|d. |N |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth TOP: Production function
MSC: Interpretive

116. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then it could be rewritten as
|a. |Y/L = AF(1, K/L, H/L, N/L) |
|b. |Y/L = AF(L, 1, H/L, N/L) |
|c. |Y/L = AF(L, K/L, 1, N/L) |
|d. |Y/L = AF(L, K/L, H/L, 1) |

ANS: A DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Interpretive

117. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then if we know the values of A, K/L, H/L, and N/L, we also know the value of
|a. |output. |
|b. |labor productivity. |
|c. |A. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Interpretive

118. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then it is possible that the specific form of the production function is
|a. |Y = 4L + 2K + 3H + N |
|b. |Y = (L + K + H + N)/4 |
|c. |Y =2[pic] |
|d. |Y = 4[pic] |

ANS: C DIF: 3 REF: 25-2
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Constant returns to scale MSC: Analytical

Sec03 - Production and Growth - Economic Growth and Public Policy

MULTIPLE CHOICE

1. “When workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly.” This statement
|a. |represents the traditional view of the production process. |
|b. |is an assertion that capital is subject to diminishing returns. |
|c. |is made under the assumption that the quantities of human capital, natural resources, and technology are being held |
| |constant. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Interpretive

2. “When workers have a relatively small quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity by a relatively large amount.” This statement
|a. |is an assertion that production functions have the property of constant returns to scale. |
|b. |is consistent with the view that capital is subject to diminishing returns. |
|c. |is inconsistent with the view that it is easier for a country to grow fast if it starts out relatively poor. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Interpretive

3. When a society decides to increase its quantity of physical capital, the society
|a. |can avoid the usual need to face trade-offs. |
|b. |is apparently not very concerned about its rate of economic growth in the future. |
|c. |is in effect deciding to consume fewer goods and services in the present. |
|d. |is in effect deciding to save less of its current income in the present. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Investment
MSC: Interpretive

4. The catch-up effect can help explain
|a. |the spectacular economic growth experienced by South Korea over the years 1960 to 1990. |
|b. |the spectacular economic growth experienced by the United States over the years 1960 to 1990. |
|c. |why the diminishing-returns property is no longer taken seriously by economists. |
|d. |why the World Bank is more inclined to encourage the flow of capital to advanced economies rather than to developing |
| |economies. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Interpretive

Figure 25-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L).

[pic]

5. Refer to Figure 25-1. The curve becomes flatter as the amount of capital per worker increases because of
|a. |increasing returns to capital. |
|b. |increasing returns to labor. |
|c. |diminishing returns to capital. |
|d. |diminishing returns to labor. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Interpretive

6. Refer to Figure 25-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?
|a. |In the long run, a higher saving rate leads to a higher level of productivity. |
|b. |In the long run, a higher saving rate leads to a higher level of income. |
|c. |In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth rate of |
| |income. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Diminishing returns | Economic growth MSC: Interpretive

7. Refer to Figure 25-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?
|a. |In the long run, a higher saving rate leads to a higher growth rate of productivity. |
|b. |In the long run, a higher saving rate leads to a higher growth rate of income. |
|c. |Returns to capital become increasingly smaller as the amount of capital per worker increases. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Diminishing returns | Economic growth MSC: Interpretive

8. Refer to Figure 25-1. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2007, then it will definitely remain at point A in 2008 if, between 2007 and 2008,
|a. |the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural resources, |
| |and technology all double as well. |
|b. |the quantity of physical capital doubles; human capital, natural resources, and technology all double as well; and the |
| |number of workers remains constant. |
|c. |the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and |
| |technology all double as well. |
|d. |the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and |
| |technology remain constant. |

ANS: D DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Analytical

9. Investment in
|a. |physical capital, unlike investment in human capital, has an opportunity cost. |
|b. |physical capital, like investment in human capital, has an opportunity cost. |
|c. |human capital is particularly attractive because it involves no externalities. |
|d. |human capital has been shown to be relatively unimportant, relative to investment in physical capital, for a country’s |
| |long-run economic success. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Physical capital | Human capital MSC: Interpretive

10. The return to schooling for society is higher than the return to schooling for the individual if
|a. |the concept of diminishing returns applies to education. |
|b. |the concept of constant returns to scale applies to education. |
|c. |human capital conveys positive externalities. |
|d. |investment in human capital involves no opportunity costs. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Human capital | Externalities
MSC: Interpretive

11. Studies on health, nutrition, and living standards suggest that
|a. |short height can be an indicator of malnutrition. |
|b. |workers’ height and their productivity are unrelated. |
|c. |nations’ economic development and their workers’ eating habits are unrelated. |
|d. |there is no causal link between nutrition and economic growth. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Productivity | Economic growth MSC: Interpretive

12. Which of the following terms is used to refer to the ability of people to exercise authority over the resources they own?
|a. |natural rights |
|b. |property rights |
|c. |input control |
|d. |collective control |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Definitional

13. In countries that experience political instability, standards of living tend to be low because of
|a. |violations of diminishing returns. |
|b. |excessive levels of caloric intake. |
|c. |lack of respect for property rights. |
|d. |attempts by government officials to thwart the catch-up effect. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Property rights | Standard of living MSC: Interpretive

14. Countries that pursued outward-oriented policies in the 20th century
|a. |experienced lower rates of economic growth than did countries that pursued inward-oriented policies. |
|b. |experienced higher levels of political instability than did countries that pursued inward-oriented policies. |
|c. |include Singapore, South Korea, and Taiwan. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Free trade
MSC: Interpretive

15. Rapid population growth
|a. |was hailed by Thomas Robert Malthus as the key to future economic growth. |
|b. |tends to lead to higher levels of educational attainment. |
|c. |is the main reason that less developed nations are poor. |
|d. |may depress economic prosperity by reducing the amount of capital which each worker has to work with. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Interpretive

16. It has been suggested that a possible benefit of rapid population growth is the likelihood that when there are more people, then there are more
|a. |teachers, and so students acquire more knowledge and skills. |
|b. |people to discover things, and so technological progress is rapid. |
|c. |savers, and so capital per worker tends to increase over time. |
|d. |consumers, and so economic growth is more rapid. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Interpretive

17. One of the Ten Principles of Economics in Chapter 1 is that people face tradeoffs. The growth that arises from capital accumulation is not a free lunch. It requires that society
|a. |conserve resources for future generations. |
|b. |sacrifice consumption goods and services now in order to enjoy more consumption in the future. |
|c. |recycle resources so that future generations can produce goods and services with the accumulated capital. |
|d. |None of the above is correct. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Investment
MSC: Interpretive

18. Accumulating capital
|a. |requires that society sacrifice consumption goods in the present. |
|b. |allows society to consume more in the present. |
|c. |decreases saving rates. |
|d. |involves no tradeoffs. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Capital | Saving
MSC: Interpretive

19. The traditional view of the production process is that capital is subject to
|a. |constant returns. |
|b. |increasing returns. |
|c. |diminishing returns. |
|d. |diminishing returns for low levels of capital, and increasing returns for high levels of capital. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Definitional

20. If there are diminishing returns to capital, then
|a. |capital produces fewer goods as it ages. |
|b. |old ideas are not as useful as new ones. |
|c. |increases in the capital stock eventually decrease output. |
|d. |increases in the capital stock increase output by ever smaller amounts. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Interpretive

21. In the long run, a higher saving rate
|a. |cannot increase the capital stock. |
|b. |means that people must consume less in the future. |
|c. |increases the level of productivity. |
|d. |None of the above is correct. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Interpretive

22. In the long run, a higher saving rate
|a. |cannot increase the capital stock. |
|b. |increases the growth rate of income. |
|c. |increases the growth rate of productivity. |
|d. |None of the above is correct. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Interpretive

23. In the long run, an increase in the saving rate
|a. |doesn’t change the level of productivity or income. |
|b. |raises the levels of both productivity and income. |
|c. |raises the level of productivity but not the level of income. |
|d. |raises the level of income but not the level of productivity. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

24. If a country were to increase its saving rate, then in the long run it would also increase its
|a. |level of income. |
|b. |growth rate of income. |
|c. |growth rate of productivity. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Interpretive

25. If a country’s saving rate declined, then other things the same, in the long run the country would have
|a. |lower productivity, but not lower real GDP per person. |
|b. |lower productivity and lower real GDP per person. |
|c. |lower real GDP per person, but not lower productivity |
|d. |neither lower productivity nor lower real GDP per person. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

26. If a country's saving rate increases, then in the long run
|a. |both productivity growth and income growth increase. |
|b. |only productivity growth increases. |
|c. |only income growth increases. |
|d. |neither productivity growth nor income growth increase. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

27. If a country's saving rate increases, then in the long run
|a. |productivity is higher but real GDP per person is not higher. |
|b. |real GDP per person is higher but productivity is not higher. |
|c. |productivity and real GDP per person are both higher. |
|d. |neither productivity nor real GDP per person is higher. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

28. Other things the same, a country that increases its saving rate increases
|a. |its future productivity and future real GDP. |
|b. |neither its future productivity nor future real GDP. |
|c. |its future productivity, but not its future real GDP. |
|d. |its future real GDP, but not its future productivity. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

29. Other things the same, a country that increases its savings rate will have
|a. |higher future capital and higher future real GDP per person. |
|b. |higher future capital but not higher future real GDP per person. |
|c. |higher future real GDP per person but not higher future capital. |
|d. |neither higher future capital nor higher future real GDP per person. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Capital
MSC: Interpretive

30. Suppose Turkey increases its saving rate. In the long run
|a. |the growth rates of productivity and real GDP per person increase. |
|b. |productivity and real GDP per person increase. |
|c. |the growth rate of productivity increases, and real GDP per person increases. |
|d. |productivity increases, and the growth rate of real GDP per person increases. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Applicative

31. Suppose that Slovenia undertakes a policy to increase its saving rate. This policy will likely
|a. |have no impact on GDP growth. |
|b. |lead to higher GDP growth for a few years. |
|c. |lead to higher GDP growth for a period of several decades. |
|d. |lead to a permanently higher growth rate. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Applicative

32. Suppose that a country increased its saving rate. In the long run it would have
|a. |higher productivity, and another unit of capital would increase output by more than before. |
|b. |higher productivity, but another unit of capital would increase output by less than before. |
|c. |lower productivity, and another unit of capital would increase output by more than before. |
|d. |lower productivity, but another unit of capital would increase output by less than before. |

ANS: B DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Diminishing returns
MSC: Analytical

33. Other things equal, relatively poor countries tend to grow
|a. |slower than relatively rich countries; this is called the poverty trap. |
|b. |slower than relatively rich countries; this is called the fall-behind effect. |
|c. |faster than relatively rich countries; this is called the catch-up effect. |
|d. |faster than relatively rich countries; this is called the constant-returns-to-scale effect. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Definitional

34. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that
|a. |the growth rate will not change in either country. |
|b. |the country that started with less capital per worker will grow faster. |
|c. |the country that started with more capital per worker will grow faster. |
|d. |both countries will grow and at the same rate. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Applicative

35. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the long run
|a. |both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in |
| |the country with more capital. |
|b. |both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in |
| |the country with less capital. |
|c. |both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real|
| |GDP per person will have been greater in the country with more capital. |
|d. |both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real|
| |GDP per person will have been greater in the country with less capital. |

ANS: D DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Applicative

36. Real GDP per person is $30,000 in Country A, $20,000 in Country B, and $11,000 in Country C. Saving per person is $1,000 in all three countries. Other things equal, we would expect that
|a. |all three countries will grow at the same rate. |
|b. |Country A will grow the fastest. |
|c. |Country B will grow the fastest. |
|d. |Country C will grow the fastest. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Applicative

37. Other things the same, if a country increased its saving rate, in 40 years or so it would likely have
|a. |higher productivity, and a higher growth rate of real GDP. |
|b. |higher productivity, but not a higher growth rate of real GDP. |
|c. |the same productivity and growth of real GDP it began with. |
|d. |None of the above is correct. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Interpretive

38. Which of the following best describes the response of output as time passes to an increase in the saving rate?
|a. |The growth rate of output does not change. |
|b. |The growth rate of output increases and gets even larger as time passes. |
|c. |The growth rate of output increases and does not change as time passes. |
|d. |The growth rate of output increases, but diminishes to its former level as time passes. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Diminishing returns
MSC: Interpretive

39. An increase in the saving rate would, other things the same,
|a. |increase growth more for a poor country than for a rich country, and raise growth permanently. |
|b. |increase growth more for a poor country than for a rich country, but raise growth temporarily. |
|c. |increase growth more for a rich country than for a poor country, and raise growth permanently. |
|d. |increase growth more for a rich country than for a poor country, but raise growth temporarily. |

ANS: B DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Applicative

40. Consider three imaginary countries. In Old York, saving amounts to $3,000 and consumption amounts to $7,000; in New Frank, saving amounts to $2,000 and consumption amounts to $8,000; and in Ganzee, saving amounts to $4,500 and consumption amounts to $10,500. The saving rate is
|a. |higher in Old York than in Ganzee, and it is higher in Ganzee than in New Frank. |
|b. |higher in New Frank than in Ganzee, and it is higher in Ganzee than in Old York. |
|c. |higher in Ganzee than in New Frank, and it is the same in New Frank and Old York. |
|d. |higher in Old York than in New Frank, and it is the same in Old York and Ganzee. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving
MSC: Applicative

41. The traditional view of the production process is that capital is subject to
|a. |diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich|
| |countries. |
|b. |diminishing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich|
| |countries. |
|c. |increasing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich |
| |countries. |
|d. |increasing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich |
| |countries. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Catch-up effect | Diminishing returns MSC: Applicative

42. The traditional view that the production process has diminishing returns implies that
|a. |the increase in output growth from an increase in the saving rate rises over time, and that, other things the same, rich|
| |countries should grow faster than poor ones. |
|b. |the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, rich|
| |countries should grow faster than poor ones. |
|c. |the increase in output growth from an increase in the saving rate rises over time, and that, other things the same, poor|
| |countries should grow faster than rich ones. |
|d. |the increase in output growth from an increase in the saving rate falls over time, and that, other things the same, poor|
| |countries should grow faster than rich ones. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Diminishing returns | Catch-up effect MSC: Applicative

43. On a production function, as capital per worker increases, output per worker
|a. |increases. This increase is larger at larger values of capital per worker. |
|b. |increases. This increase is smaller at larger values of capital per worker. |
|c. |decreases. This decrease is larger at larger value of capital per worker. |
|d. |decreases. This decrease is smaller at larger value of capital per worker. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Diminishing returns MSC: Interpretive

44. The slope of the production function with capital per worker on the horizontal axis and output per worker on the vertical axis
|a. |is positive and gets steeper as capital per worker rises. |
|b. |is positive and gets flatter as capital per worker rises. |
|c. |is negative and gets steeper as capital per worker rises. |
|d. |is negative and gets flatter as capital per worker rises. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Production function | Diminishing returns MSC: Interpretive

45. The catch-up effect refers to the idea that
|a. |saving will always catch-up with investment spending. |
|b. |it is easier for a country to grow fast and so catch-up if it starts out relatively poor. |
|c. |population eventually catches-up with increased output. |
|d. |if investment spending is low, increased saving will help investment to "catch-up." |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Definitional

46. The logic behind the catch-up effect is that
|a. |workers in countries with low incomes will work more hours than workers in countries with high incomes. |
|b. |the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. |
|c. |new capital adds more to production in a country that doesn't have much capital than in a country that already has much |
| |capital. |
|d. |None of the above is correct. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Interpretive

47. Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth century?
|a. |Ethiopia |
|b. |the United States |
|c. |Canada |
|d. |South Korea |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Definitional

48. Which of the following is consistent with the catch-up effect?
|a. |The United States had a higher growth rate before 1900 than after. |
|b. |After World War II the United States had lower growth rates than war-ravaged European countries. |
|c. |Although the United States has a relatively high level of output per person, its growth rate is rather modest compared |
| |to some countries. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Applicative

49. Over the period 1960-1991,
|a. |South Korea had a higher growth rate than the United States because it had a higher ratio of investment to GDP. |
|b. |the United States had a higher growth rate than South Korea because it had a higher ratio of investment to GDP. |
|c. |South Korea had a higher growth rate than the United States even though it had a similar ratio of investment to GDP. |
|d. |the United States had a higher growth rate than South Korea even though it had a similar ratio of investment to real |
| |GDP. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Interpretive

50. Lower Equitorial and Upper Equitorial are the same except Lower Equitorial has a larger capital stock. Both countries undertake policies that raise their saving rates to the same higher level. We would expect that
|a. |both countries would have permanent increases in their growth rates, but the increase would initially be larger in Lower|
| |Equitorial. |
|b. |both countries would have permanent increases in their growth rates, but the increase would initially be smaller in |
| |Upper Equitorial. |
|c. |both countries would have temporary increases in their growth rates, but the increase would be larger in Lower |
| |Equitorial. |
|d. |both countries would have temporary increases in their growth rates, but the increase would be smaller in Lower |
| |Equitorial. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Catch-up effect
MSC: Applicative

51. If an American-based firm opens and operates a new watch factory in Panama, then it is engaging in
|a. |foreign portfolio investment. |
|b. |foreign financial investment. |
|c. |foreign direct investment. |
|d. |indirect foreign investment. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance TOP: Foreign investment
MSC: Definitional

52. In the 1800s, Europeans purchased stock in American companies that used the funds to build railroads and factories. The Europeans who did this engaged in
|a. |foreign portfolio investment. |
|b. |indirect domestic investment. |
|c. |foreign direct investment. |
|d. |foreign indirect investment. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance
TOP: Foreign investment | Economic growth MSC: Definitional

53. Suppose that an American opens and operates a candy factory in Finland. This is an example of
|a. |foreign direct investment. American saving is used to finance Finish investment. |
|b. |foreign direct investment. American saving is used to finance American investment. |
|c. |foreign portfolio investment. American saving is used to finance Finish investment. |
|d. |foreign portfolio investment. American saving is used to finance American investment. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance TOP: Foreign investment
MSC: Definitional

54. Foreign saving is used for domestic investment when foreigners engage in
|a. |foreign direct investment. |
|b. |foreign portfolio investment. |
|c. |either foreign direct investment or foreign portfolio investment. |
|d. |None of the above is correct. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: International trade and finance TOP: Foreign investment
MSC: Interpretive

55. Suppose U.S.-based Intel Corporation builds and operates a new computer chip factory in Honduras. Future production from such an investment would
|a. |increase Honduran GDP more than it would increase Honduran GNP. |
|b. |increase Honduran GNP more than it would increase Honduran GDP. |
|c. |not affect Honduran GNP, but would increase Honduran GDP. |
|d. |have no affect on either Honduran GDP or GNP. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: International trade and finance
TOP: Foreign investment | Gross domestic product | Gross national product
MSC: Applicative

56. Suppose Japanese-based Sony Corporation builds and operates a new digital camera factory in the United States. Future production from such an investment would
|a. |increase U.S. GNP more than it would increase U.S. GDP. |
|b. |increase U.S. GDP more than it would increase U.S. GNP. |
|c. |not affect U.S. GNP, but would increase U.S. GDP. |
|d. |have no affect on U.S. GNP or GDP. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: International trade and finance
TOP: Foreign investment | Gross domestic product | Gross national product
MSC: Applicative

57. The opening of a new American-owned factory in Egypt would tend to increase Egypt's GDP more than it increases Egypt's GNP because
|a. |some of the income from the factory accrues to people who do not live in Egypt. |
|b. |gross domestic product is income earned within a country by both residents and nonresidents, whereas gross national |
| |product is the income earned by residents of a country while producing both at home and abroad. |
|c. |all of the income from the factory is included in Egypt's GDP. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: International trade and finance
TOP: Foreign investment | Gross domestic product | Gross national product
MSC: Applicative

58. When Mexico experiences investment from abroad, it experiences, as a result,
|a. |an increase in productivity. |
|b. |a decrease in Gross National Product (GNP). |
|c. |lower wages for Mexican workers. |
|d. |None of the above is correct. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: International trade and finance
TOP: Foreign investment | Productivity MSC: Applicative

59. Investment from abroad
|a. |is a way for poor countries to learn the state-of-the-art technologies developed and used in richer countries. |
|b. |is viewed by economists as a way to increase growth. |
|c. |often requires removing restrictions that governments have imposed on foreign ownership of domestic capital. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Foreign investment
MSC: Interpretive

60. An organization that tries to encourage the flow of investment to poor countries is the
|a. |World Bank. |
|b. |Organization of Less Developed Countries. |
|c. |Alliance of Developing Countries. |
|d. |International Development Alliance. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Foreign investment | World Bank MSC: Definitional

61. In the U.S., each additional year of schooling has historically raised a person's wage on average by about
|a. |2 percent. |
|b. |5 percent. |
|c. |10 percent. |
|d. |15 percent. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Wages
MSC: Definitional

62. The term human capital can be used to describe
|a. |technology. |
|b. |unskilled labor. |
|c. |expenditures that result in increased investment from abroad. |
|d. |health. |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Human capital
MSC: Definitional

63. In the U.S., each additional year of schooling has historically raised a person's wage on average by about
|a. |5 percent. In less developed countries the gap between the wages of educated and uneducated workers is smaller. |
|b. |10 percent. In less developed countries the gap between the wages of educated and uneducated workers is smaller. |
|c. |5 percent. In less developed countries the gap between the wages of educated and uneducated workers is larger. |
|d. |10 percent. In less developed countries the gap between the wages of educated and uneducated workers is larger. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Wages
MSC: Definitional

64. Which of the following is generally an opportunity cost of investment in human capital?
|a. |future job security |
|b. |forgone present wages |
|c. |increased earning potential |
|d. |All of the above are correct. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Human capital
MSC: Interpretive

65. Educated people may generate ideas that increase production. These ideas
|a. |produce a return to society from education that is greater than the return to the individual. |
|b. |could justify government subsides for education. |
|c. |are external benefits of education. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

66. Which of the following is an example of the "brain drain?"
|a. |A country's most highly educated workers emigrate to rich countries. |
|b. |A country has such a poor educational system that human capital falls over time. |
|c. |The population of a country grows so fast that the educational system can't keep up. |
|d. |A country steals patented technology from another country. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Human capital
MSC: Interpretive

67. Economist Robert Fogel focused on which of the following factors as one determinant of long-run economic growth?
|a. |education |
|b. |research and development |
|c. |nutrition |
|d. |trade restrictions |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

68. According to research by Robert Fogel, what proportion of the British population in 1780 was so malnourished that they could not perform manual labor?
|a. |40 percent |
|b. |20 percent |
|c. |10 percent |
|d. |5 percent |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

69. Roughly what percentage of growth in real GDP per person in Britain between 1790 and 1980 was accounted for by improved nutrition according to the estimates of Robert Fogel?
|a. |30 percent |
|b. |20 percent |
|c. |10 percent |
|d. |5 percent |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Definitional

70. Which of the following statements is correct?
|a. |In an economy-wide sense, property rights are an important prerequisite for the price system to work. |
|b. |Property rights give people the ability to exercise authority over the resources they own. |
|c. |Based on the available evidence, the existence of well-established and well-enforced property rights appears to be |
| |associated with an enhanced standard of living. |
|d. |All of the above are correct. |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Interpretive

71. The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political opponents, and he has given the farms to his friends. His friends don't know much about farming. The courts in Turan have ruled that the seizures are illegal, but the dictator has ignored the rulings. Other things equal, we would expect that the growth rate in Turan will
|a. |fall temporarily, but will return to where it was when the new owners learn how to farm. |
|b. |increase because the total amount of human capital in the country will increase as the new owners learn how to farm. |
|c. |fall and remain lower for a long time. |
|d. |not be affected unless widespread civil disorder or civil war results. |

ANS: C DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Political behavior
MSC: Applicative

72. The dictator of a certain country requires that companies planning to open or expand must pay a large fee to file an application one year prior to building new factories or expanding existing ones. Other things the same, in the long run this requirement would
|a. |reduce real GDP per person and productivity. |
|b. |reduce real GDP per person but not productivity. |
|c. |reduce productivity but not real GDP per person. |
|d. |None of the above is correct. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Applicative

73. Suppose that a new government is elected in Lawrencia. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Lawrencia find these efforts credible and outsiders believe these changes will be effective and long lasting. These changes will probably
|a. |raise real GDP per person and productivity in Lawrencia. |
|b. |raise real GDP per person but not productivity in Lawrencia. |
|c. |raise productivity but not real GDP per person in Lawrencia. |
|d. |raise neither productivity nor real GDP per person in Lawrencia. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Property rights
MSC: Applicative

74. Inward-oriented policies
|a. |include imposing tariffs and other trade restrictions. |
|b. |have generally increased productivity and growth in the countries that pursued them. |
|c. |promote the production of goods and services that the country produces most efficiently. |
|d. |All of the above are correct. |

ANS: A DIF: 1 REF: 25-3
TOP: Trade policy MSC: Definitional

75. Inward-oriented policies
|a. |are generally supported by economists. |
|b. |are primarily concerned with the development of human capital. |
|c. |in some ways are like prohibiting the use of certain technologies. |
|d. |All of the above are correct. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Interpretive

76. The president of Improvia, a developing country, proposes that his country needs to help domestic firms by imposing trade restrictions.
|a. |These are outward-oriented policies and most economists believe they would have beneficial effects on growth in |
| |Improvia. |
|b. |These are outward-oriented policies and most economists believe they would have adverse effects on growth in Improvia. |
|c. |These are inward-oriented policies and most economists believe they would have beneficial effects on growth in Improvia.|
|d. |These are inward-oriented policies and most economists believe they would have adverse effects on growth in Improvia. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Interpretive

77. In the past there have been violent protests against the World Bank and the World Trade Organization. The protesters argued that these institutions promote free trade and also encourage corporations in rich countries to invest in poor countries. The protesters contended that these practices make rich countries richer and poor countries poorer. An economist would
|a. |disagree with the protesters because these practices will help make both rich and poor countries richer. |
|b. |disagree with the protesters about free trade, but would agree with the protesters about corporate investment. |
|c. |disagree with the protesters about corporate investment, but would agree with the protesters about free trade. |
|d. |agree with the protesters. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Applicative

78. Outward-oriented policies
|a. |allow countries to take advantage of gains from trade. |
|b. |have generally led to high growth for the countries that pursued them. |
|c. |receive widespread support from economists. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Interpretive

79. When a country removes trade barriers and imports toys and exports farm machinery,
|a. |its growth slows. |
|b. |its productivity decreases. |
|c. |it is essentially transforming farm machinery into toys. |
|d. |its economic well-being decreases while that of the country that sells toys increases. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Applicative

80. Suppose a country reduces trade restrictions. This country would be pursing an
|a. |inward policy, which most economists believe has beneficial effects on the economy. |
|b. |inward policy, which most economists believe has adverse effects on the economy. |
|c. |outward policy, which most economists believe has beneficial effects on the economy. |
|d. |outward policy, which most economists believe has adverse effects on the economy. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Trade policy
MSC: Interpretive

81. National defense and knowledge are generally considered to be
|a. |private goods. |
|b. |public goods. |
|c. |proprietary goods. |
|d. |societal goods. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: The Study of Economics, and definitions of economics
TOP: Public goods MSC: Definitional

82. Patents turn new ideas into
|a. |public goods, and increase the incentive to engage in research. |
|b. |public goods, but decrease the incentive to engage in research. |
|c. |private goods, and increase the incentive to engage in research. |
|d. |private goods, but decrease the incentive to engage in research. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: The Study of Economics, and definitions of economics
TOP: Private goods MSC: Interpretive

83. Once an idea enters society's pool of knowledge, the knowledge becomes a
|a. |societal good. |
|b. |private good. |
|c. |public good. |
|d. |proprietary good. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: The Study of Economics, and definitions of economics
TOP: Public goods MSC: Definitional

84. In medieval Europe an important technological advance was the use of the padded horse collar for plowing. Once this idea was thought of, other people used it. This illustrates that knowledge is generally a
|a. |public good. |
|b. |societal good. |
|c. |private good. |
|d. |normal good. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: The Study of Economics, and definitions of economics
TOP: Public goods MSC: Interpretive

85. Inventors often obtain patents on new products and processes, thereby turning new ideas into
|a. |private goods and increasing the incentive to engage in research. |
|b. |private goods but decreasing the incentive to engage in research. |
|c. |public goods and increasing the incentive to engage in research. |
|d. |public goods but decreasing the incentive to engage in research. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: The Study of Economics, and definitions of economics
TOP: Private goods MSC: Applicative

86. Malthus predicted that the power of population
|a. |was greater than the power of the earth to produce subsistence. His forecast was on the mark. |
|b. |was greater than the power of the earth to produce subsistence. His forecast was off the mark. |
|c. |was less than the power of the earth to produce subsistence. His forecast was on the mark. |
|d. |was less than the power of the earth to produce subsistence. His forecast was off the mark. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Economists | Population growth MSC: Interpretive

87. A rapid increase in the number of workers, other things the same, is likely in the short term to
|a. |raise real GDP per person, but decrease real GDP. |
|b. |decrease both real GDP and real GDP per person. |
|c. |raise both real GDP and real GDP per person. |
|d. |raise real GDP, but decrease real GDP per person. |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Interpretive

88. Which of the following is not correct?
|a. |China allows only one child per family and couples that violate this rule are subject to substantial fines. |
|b. |In developed countries, population growth is consistently about 3 percent per year; in developing countries it is |
| |consistently about 5 percent per year. |
|c. |Educational attainment tends to be lowest in countries with the highest population growth. |
|d. |Economists generally believe that a country that decreases a high population growth rate can increase its economic |
| |growth rate. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Interpretive

89. Which of the following countries achieved higher economic growth, in part by mandating a reduction in population growth?
|a. |Great Britain |
|b. |China |
|c. |Australia |
|d. |France |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

90. Which of the following is an observation made by economist Michael Kremer?
|a. |World growth rates increased as the population increased. |
|b. |Technological progress allows for increasing population because of advances in agriculture. |
|c. |World population is growing so rapidly that soon it will outstrip natural resources and our standard of living will |
| |decline. |
|d. |All of the above are observations made by Kremer. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

91. Which of the following is correct?
|a. |If developing countries limit career and educational opportunities for women, birth rates are likely to be lower. |
|b. |Growth rates in developed and developing countries are nearly the same. |
|c. |Historically, in periods where the rate of population growth was high, so was the rate of growth in world real GDP per |
| |person. |
|d. |None of the above is correct. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

92. Which of the following is true?
|a. |Kremer argued that with greater population, society would generate more ideas so that growth of real GDP per person |
| |could continue. Malthus argued that increasing population would outstrip agricultural production. |
|b. |Kremer argued that increases in population would reduce the amount of human and physical capital per worker so that |
| |eventually the standard of living would decline. Malthus argued that increases in technology would allow increased |
| |output growth so that even with population growth, society would enjoy a higher standard of living. |
|c. |Malthus argued that with greater population, society would generate more ideas so that growth of real GDP per person |
| |could continue. Kremer argued that increasing population would outstrip agricultural production. |
|d. |Malthus argued that increases in population would reduce the amount of human and physical capital per worker so that |
| |eventually the standard of living would decline. Kremer argued that increases in technology would allow increased output|
| |growth so that even with population growth, society would enjoy a higher standard of living. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

93. Over extended periods of time, population growth
|a. |has no effect on the standard of living. |
|b. |has uncertain effects on the standard of living. |
|c. |clearly raises the standard of living. |
|d. |clearly lowers the standard of living. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Population growth | Standard of living MSC: Interpretive

94. On the basis of theory and empirical evidence, economists have reached several conclusions about economic growth. Which of the following is not one of these conclusions?
|a. |A relatively simple way to increase growth rates permanently is to increase a country's saving rate. |
|b. |Growth is generally inhibited rather than promoted by policies like protective tariffs. |
|c. |Well-established property rights that are enforced by fair and efficient courts are important to economic growth. |
|d. |Countries with few domestic natural resources still have opportunities for economic growth. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

95. All else equal, which of the following would tend to cause real GDP per person to rise?
|a. |a change from outward-oriented policies to inward-oriented policies |
|b. |an increase in investment in human capital |
|c. |a weakening of property rights |
|d. |All of the above are correct. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

96. Which of the following statements is not correct?
|a. |The catch-up effect is based on the assumption of diminishing returns to capital. |
|b. |Investment in poor countries by citizens of rich countries is one way poor countries can learn new technologies. |
|c. |Malthus argued that charity and government aid was an effective way to reduce poverty. |
|d. |Peace and justice are keys to growth. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

97. Senator Noitall says that in order to help poor countries develop, the United States should: 1. Prevent U.S. corporations from investing in poor countries because they take profits that the poor countries should have; 2. Not import goods from poor countries that use child labor; 3. Work to promote political stability in poor countries; and 4. Reduce poor countries’ reliance on market forces in their economies. How many of these ideas are likely to help poor countries grow?
|a. |1 |
|b. |2 |
|c. |3 |
|d. |4 |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

98. Senator Smith says that in order to help poor countries develop, the United States should: 1. Prevent U.S. corporations from investing in poor countries because they take profits that the poor countries should have; 2. reduce or eliminate subsidizes to U.S. producers when poor countries have a comparative advantage producing those goods the U.S. subsidizes; 3. Work to promote political stability in poor countries; and 4. Reduce poor countries reliance on market forces in their economies. How many of these ideas are likely to help poor countries grow?
|a. |1 |
|b. |2 |
|c. |3 |
|d. |4 |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

99. The president of a poor country has announced that he will implement the following measures which he claims are designed to increase growth: 1. Reduce corruption in the legal system; 2. Reduce reliance on market forces because they allocate goods and services in an unfair manner; 3. Restrict investment in domestic industries by foreigners because they take some of the profits out of the country; 4. Encourage trade with neighboring countries; and 5. Increase the fraction of GDP devoted to consumption. How many of these measures will have a positive effect on growth?
|a. |1 |
|b. |2 |
|c. |3 |
|d. |4 |

ANS: B DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

100. The Economic Development Minister of a country has a list of things she thinks may explain her country's low growth of real GDP per person relative to other countries. She asks you to pick the one you think most likely explains her country's low growth. Which of the following contributes to low growth?
|a. |poorly enforced property rights |
|b. |outward-oriented trade policies |
|c. |policies that permit foreign investment |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

101. Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the following could explain the failure of a poor county to catch up?
|a. |The poor country has outward-oriented trade policies. |
|b. |The poor country allows foreign direct investment. |
|c. |The poor country has poorly developed property rights. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Economic growth | Property rights MSC: Applicative

102. Other things the same, a country that increases its saving rate increases
|a. |its future productivity and future real GDP. |
|b. |neither its future productivity nor future real GDP. |
|c. |its future productivity, but not its future real GDP. |
|d. |its future real GDP, but not its future productivity. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

103. In an economy where net exports are zero, if saving rises in some period, then in that period
|a. |consumption and investment fall. |
|b. |consumption falls and investment rises. |
|c. |consumption rises and investment falls. |
|d. |consumption rises and investment falls. |

ANS: B DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Investment
MSC: Interpretive

104. Other things the same, if a country raises its saving rate, then in the long run
|a. |both the level and growth rate of real GDP are unchanged. |
|b. |the level of real GDP is higher but the growth rate of real GDP is unchanged. |
|c. |both the level and growth rate of real GDP are higher. |
|d. |None of the above are correct. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Saving | Investment
MSC: Interpretive

105. All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?
|a. |Output will rise by more than it did when the previous unit was added. |
|b. |Output will rise but by less than it did when the previous unit was added. |
|c. |Output will fall by more than it did when the previous unit was added. |
|d. |Output will fall but by less then it did when the previous unit was added. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Interpretive

106. All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100 units this year,
|a. |the increase in output was greater for this year than last year. |
|b. |the increase in output was greater last year than this year. |
|c. |the increase in output is the same in both years. |
|d. |None of the above is necessarily correct. |

ANS: B DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Diminishing returns
MSC: Applicative

107. All else equal, if there are diminishing returns, then what happens to productivity if both capital and labor increase?
|a. |Productivity will definitely fall. |
|b. |Productivity will definitely be unchanged. |
|c. |Productivity will definitely rise. |
|d. |None of the above are necessarily correct. |

ANS: D DIF: 3 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Diminishing returns | Productivity MSC: Analytical

108. Country A and country B are the same except country A currently has a lower level of capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then
|a. |output in country A increases by more than in country B. |
|b. |output in country A increases by the same amount as in country B. |
|c. |output in country A increases by less than in country B. |
|d. |None of the above is necessarily correct. |

ANS: A DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Diminishing returns | Catch-up effect MSC: Applicative

109. A country with a relatively low level of real GDP per person is considering adopting two policies to promote economic growth. The first is to increase barriers to trade. The second is to restrict foreign portfolio investment. Which of these policies would most economist think would promote growth?
|a. |both the first and the second |
|b. |the first but not the second |
|c. |the second but not the first |
|d. |neither the first nor the second |

ANS: D DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Free trade | Foreign investment MSC: Interpretive

110. Other things the same, higher population growth
|a. |raises the amount of physical capital per worker and there is some evidence that it raises the pace of technological |
| |progress. |
|b. |raises the amount of physical capital per worker, but there is some evidence that it reduces the pace of technological |
| |progress. |
|c. |reduces the amount of physical capital per worker, but there is some evidence that it raises the pace of technological |
| |progress. |
|d. |reduces the amount of physical capital per worker and there is some evidence that it reduces the pace of technological |
| |progress. |

ANS: C DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Population growth
MSC: Definitional

111. Electronics firms may be able to get patents on their ideas. Doing so makes their ideas
|a. |private goods rather than public goods. This gives people more incentive to engage in research. |
|b. |private goods rather than public goods. This gives people less incentive to engage in research. |
|c. |public goods rather than private goods. This gives people more incentive to engage in research. |
|d. |public goods rather than private goods. This gives people more incentive to engage in private research. |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Private goods | Public goods
MSC: Interpretive

112. If Dark Nights, a U.S.manufacturer of winter clothing, opens a new factory in Austria, then
|a. |Austrian GNP increases by more than Austrian GDP, which includes income earned by foreigners working in Austria. |
|b. |Austrian GNP increases by more than Austrian GDP, which excludes income earned by foreigners working in Austria. |
|c. |Austrian GNP increases by less than Austrian GDP, which includes income earned by foreigners working in Austria. |
|d. |Austrian GNP increases by less than Austrian GDP, which excludes income earned by foreigners working in Austria. |

ANS: C DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth
TOP: Foreign investment | Gross domestic product | Gross national product
MSC: Definitional

113. Which of the following is correct?
|a. |There is no debate about the effects of higher population growth on economic growth. |
|b. |Natural resources clearly place limits on growth; there is simply no way to reduce either the amount or type of natural |
| |resources needed to produce goods. |
|c. |How much an increase in capital increases a country’s output is independent of that country’s current level of capital. |
|d. |Economists argue that outward rather than inward policies are likely to promote economic growth. |

ANS: D DIF: 2 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Interpretive

114. Which of the following provide benefits to society at large and not just to the person(s) who pursues it?
|a. |both technological knowledge that is a public good and education |
|b. |technological knowledge that is a public good, but not education |
|c. |education, but not technological knowledge that is a public good |
|d. |neither education, nor technological knowledge that is a public good |

ANS: A DIF: 1 REF: 25-3
NAT: Analytic LOC: Productivity and growth TOP: Technology | Public goods
MSC: Interpretive

115. By saving more, a country
|a. |has more resources for capital goods. The increase in capital raises productivity. |
|b. |has more resources for capital goods. The increase in capital reduces productivity. |
|c. |has fewer resources for capital goods. The decrease in capital raises productivity. |
|d. |has fewer resources for capital goods. The decrease in capital reduces productivity. |

ANS: A DIF: 1 REF: 25-1
NAT: Analytic LOC: Productivity and growth TOP: Saving | Productivity
MSC: Interpretive

Sec04 - Production and Growth - Conclusion

MULTIPLE CHOICE

1. Economists differ in their views of the role of the government in promoting economic growth. At the very least, the government should
|a. |lend support to the invisible hand by maintaining property rights and political stability. |
|b. |limit foreign investment to industries that don't already exist in the country. |
|c. |impose trade restrictions to protect the interests of domestic producers and consumers. |
|d. |subsidize key industries. |

ANS: A DIF: 1 REF: 25-4
NAT: Analytic LOC: Productivity and growth TOP: Economic growth
MSC: Applicative

Chapter 28
Unemployment
TRUE/FALSE

1. Most people rely on income other than their labor earnings to maintain their standard of living.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Standard of living MSC: Definitional

2. The amount of unemployment that a country typically experiences is a determinant of that country's standard of living.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Standard of living MSC: Definitional

3. Some degree of unemployment is inevitable in a complex economy.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

4. The amount of unemployment varies little over time and across countries.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

5. When a country keeps its workers as fully employed as possible, it achieves a higher level of GDP than it would if it left many of its workers standing idle.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment | GDP MSC: Definitional

6. An economy’s natural rate of unemployment refers to the amount of unemployment that the economy normally experiences.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

7. Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Definitional

8. The natural rate of unemployment is closely associated with the short-run ups and downs of economic activity.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

9. The natural rate of unemployment is the desirable rate of unemployment for an economy.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

10. The natural rate of unemployment is constant over time.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

11. The natural rate of unemployment is impervious to economic policy.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

12. Government policy can do nothing about the natural rate of unemployment.
ANS: F DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

13. The natural rate of unemployment is a type of unemployment that does not go away on its own even in the long run.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

14. Long-run unemployment arises from a single problem that has a single solution.
ANS: F DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

15. There is no easy way for policymakers to reduce the economy’s natural rate of unemployment.
ANS: T DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

16. Measuring unemployment is the job of the Bureau of Labor Statistics.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

17. Measuring unemployment is the job of the Bureau of Labor Statistics, which is part of the U.S. Department of Commerce.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

18. Every week, the Bureau of Labor Statistics produces data on unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

19. The Bureau of Labor Statistics produces data on unemployment, types of employment, length of the average workweek, and the duration of unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

20. The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about 600 households, called the Current Population Survey.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

21. The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about 60,000 households, called the Current Population Survey.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

22. The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about 60,000 households, called the Census.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

23. The Bureau of Labor Statistics places each adult (aged 16 and older) of each surveyed household into one of three categories: employed, unemployed, and not in the labor force.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

24. The Bureau of Labor Statistics places each adult (aged 16 and older) of each surveyed household into one of four categories: employed, underemployed, unemployed, and not in the labor force.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

25. The Bureau of Labor Statistics’ “employed” category includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Definitional

26. Only paid workers are included in the Bureau of Labor Statistics’ “employed” category.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

27. Both full-time and part-time workers are included in the Bureau of Labor Statistics’ “employed” category.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Definitional

28. Some adults who were not working are included in the Bureau of Labor Statistics’ “employed” category.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

29. Adults who were not working but who had jobs from which they were temporarily absent are included in the Bureau of Labor Statistics’ “employed” category.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Definitional

30. Adults who were waiting to be recalled to a job from which they had been laid off are included in the Bureau of Labor Statistics’ “employed” category.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

31. The Bureau of Labor Statistics’ “unemployed” category includes those who were not employed, were available for work, and had tried to find employment during the previous 4 weeks.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Definitional

32. Every adult who was not employed during the previous 4 weeks is included in the Bureau of Labor Statistics’ “unemployed” category.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

33. Someone who is without work but is not looking for work is included in the Bureau of Labor Statistics’ “unemployed” category.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

34. Full-time students and homemakers are included in the Bureau of Labor Statistics’ “unemployed” category.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

35. Stay-at-home fathers are included in the Bureau of Labor Statistics’ “unemployed” category.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

36. Adults who were waiting to be recalled to a job from which they had been laid off are included in the Bureau of Labor Statistics’ “unemployed” category.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Definitional

37. Retirees are included in the Bureau of Labor Statistics’ “not in the labor force” category.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor force MSC: Definitional

38. The adult population must equal the sum of the employed, the unemployed, and those not in the labor force.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Interpretive

39. The adult population must equal the sum of the employed and the unemployed.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Interpretive

40. The Bureau of Labor Statistics defines the labor force as the sum of the employed and the unemployed.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor force MSC: Definitional

41. The labor force minus the number of employed equals the number of unemployed.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

42. The Bureau of Labor Statistics defines the unemployment rate as the percentage of the adult population that is unemployed.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment rate MSC: Definitional

43. The Bureau of Labor Statistics defines the unemployment rate as the percentage of the labor force that is unemployed.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment rate MSC: Definitional

44. The Bureau of Labor Statistics computes unemployment rates for the entire adult population and for more narrowly defined groups.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment rate MSC: Definitional

45. The Bureau of Labor Statistics defines the labor-force participation rate as the percentage of the labor force that is employed.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor-force participation rate MSC: Definitional

46. The Bureau of Labor Statistics defines the labor-force participation rate as the percentage of the total adult population that is in the labor force.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor-force participation rate MSC: Definitional

47. The labor-force participation rate is the percentage of the adult population that is either employed or unemployed.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

48. The labor-force participation rate tells us the fraction of the population that is able to participate in the labor market.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

49. The labor-force participation rate tells us the fraction of the population that has chosen to participate in the labor market.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

50. The Bureau of Labor Statistics computes labor-force participation rates for the entire adult population and for more narrowly defined groups.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor-force participation rate MSC: Definitional

Table 28-5

2010 Labor Data for Wrexington

|Number of adults employed |10,000 |
|Number of adults unemployed |2,250 |
|Number of adults not in the labor force |17,750 |

51. Refer to Table 28-5. The total adult population of Wrexington in 2010 is 30,000.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Applicative

52. Refer to Table 28-5. The total adult population of Wrexington in 2010 is 12,250.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Applicative

53. Refer to Table 28-5. The labor force of Wrexington in 2010 is 12,250.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

54. Refer to Table 28-5. The labor force of Wrexington in 2010 is 10,000.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

55. Refer to Table 28-5. The unemployment rate of Wrexington in 2010 is about 18.4 percent.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

56. Refer to Table 28-5. The unemployment rate of Wrexington in 2010 is about 7.5 percent.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

57. Refer to Table 28-5. The labor-force participation rate of Wrexington in 2010 is about 40.8 percent.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

58. Refer to Table 28-5. The labor-force participation rate of Wrexington in 2010 is about 33.3 percent.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

59. Within the U.S. population, women ages 20 and older have lower rates of labor-force participation than men.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

60. Within the U.S. population, women ages 20 and older have similar rates of labor-force participation as men.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

61. Within the U.S. population, men and women have similar rates of unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

62. Within the U.S. population, women have higher rates of unemployment than men.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

63. Within the U.S. population, blacks ages 20 and older have similar rates of labor-force participation as whites.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

64. Within the U.S. population, blacks ages 20 and older have lower rates of labor-force participation than whites.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

65. Within the U.S. population, blacks have higher rates of unemployment than whites.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

66. Within the U.S. population, blacks and whites have similar rates of unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

67. Within the U.S. population, teenagers have lower rates of labor-force participation than older workers.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

68. Within the U.S. population, teenagers have similar rates of labor-force participation as older workers.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

69. Within the U.S. population, teenagers have higher rates of unemployment than older workers.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

70. Within the U.S. population, teenagers have similar rates of unemployment as older workers.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

71. Data on the unemployment rate in the U.S. since 1960 show that the economy always has some unemployment and that the amount changes from year to year.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

72. Data on the unemployment rate in the U.S. since 1960 show that the unemployment rate sometimes is zero.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

73. The normal rate of unemployment around which the unemployment rate fluctuates is called the natural rate of unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

74. The normal rate of unemployment around which the unemployment rate fluctuates is called cyclical unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

75. The deviation of unemployment from its natural rate is called cyclical unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Definitional

76. Economists at the Congressional Budget Office estimated that for 2007, the U.S. natural rate of unemployment was 4.8 percent.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

77. In 2007, the U.S. natural rate of unemployment was estimated to be 4.8 percent, which was close to the actual rate of unemployment of 4.6 percent.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

78. Causes of the changing role of women in American society over the past several decades include new technologies that have reduced the amount of time required to complete routine household tasks, improved birth control, and changing political and social attitudes.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Role of women MSC: Interpretive

79. Over the past several decades, the difference between the labor-force participation rates of men and women in the U.S. has gradually decreased.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

80. Over the past several decades, the difference between the labor-force participation rates of men and women in the U.S. has gradually increased.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

81. Over the past several decades in the United States, the labor-force participation rate of women has increased and the labor-force participation rate of men had decreased.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

82. Over the past several decades in the United States, the labor-force participation rate of women has increased and the labor-force participation rate of men had remained steady.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

83. Causes of the decline in the U.S. men’s labor-force participation rate over the past several decades include young men now staying in school longer than their fathers and grandfathers did, older men now retiring earlier and living longer, and more fathers now staying at home to raise their children.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

84. Even though the difference in labor-force participation rates of U.S. males and females has narrowed, the labor-force participation rate of males remains higher than that of females.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

85. Measuring the amount of unemployment in the economy is a straightforward task.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

86. More than one-third of the unemployed are recent entrants into the labor force.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

87. More than three-fourths of the unemployed are recent entrants into the labor force.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

88. Not all unemployment ends with the job seeker finding a job.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

89. Almost half of all spells of unemployment end when the unemployed person leaves the labor force.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

90. Almost nine-tenths of all spells of unemployment end when the unemployed person leaves the labor force.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

91. Because people move into and out of the labor force so often, statistics on unemployment are difficult to interpret.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

92. People who report being unemployed but who, in fact, are not trying hard to find a job are really not in the labor force and therefore cause the reported unemployment rate to be higher than it would otherwise be.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

93. Rupert is collecting unemployment insurance benefits. To continue to receive his benefits, he must be looking for work. Because he’d like to continue collecting benefits rather than take a job, he applies at places that are unlikely to hire him. People like Rupert make the reported unemployment rate less than it would otherwise be.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

94. People who report being unemployed but who, in fact, are working for “under the table” pay to avoid taxes on their earnings are really employed and therefore cause the reported unemployment rate to be higher than it would otherwise be.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

95. People who report being not in the labor force but who, in fact, want to work but have given up trying to find a job after an unsuccessful search are really unemployed and therefore cause the reported unemployment rate to be lower than it would otherwise be.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

96. Discouraged workers are people who want to work but have given up trying to find a job after an unsuccessful search.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Discouraged workers
MSC: Definitional

97. It is best to view the official unemployment rate as a useful but imperfect measure of joblessness.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

98. The unemployment rate reported by the Bureau of Labor Statistics clearly understates the true unemployment rate.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

99. The Bureau of Labor Statistics defines marginally attached workers as persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Marginally attached workers MSC: Definitional

100. The Bureau of Labor Statistics defines discouraged workers as marginally attached workers who have given a job-market related reason for not currently looking for a job.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Discouraged workers MSC: Definitional

101. The Bureau of Labor Statistics’ U-1 measure of joblessness is smaller than its U-6 measure of joblessness.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-1 | U-6 MSC: Interpretive

102. The Bureau of Labor Statistics’ U-1 measure of joblessness is larger than its U-6 measure of joblessness.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-1 | U-6 MSC: Interpretive

103. The Bureau of Labor Statistics’ U-1 measure of joblessness includes only very long-term unemployed.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-1 MSC: Interpretive

104. The Bureau of Labor Statistics’ U-2 measure of joblessness includes job losers and job leavers.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-2 MSC: Interpretive

105. The Bureau of Labor Statistics’ U-3 measure of joblessness is the official unemployment rate.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-3 MSC: Interpretive

106. The Bureau of Labor Statistics’ U-4 measure of joblessness includes discouraged workers.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-4 MSC: Interpretive

107. The Bureau of Labor Statistics’ U-5 measure of joblessness is the official unemployment rate.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-5 MSC: Interpretive

108. The Bureau of Labor Statistics’ U-5 measure of joblessness includes marginally attached workers.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | U-5 MSC: Interpretive

109. Most spells of unemployment are short, and most unemployment observed at any given time is long-term.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

110. Most spells of unemployment are long, and most unemployment observed at any given time is short-term.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

111. Most spells of unemployment are short, and most unemployment observed at any given time is short-term.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

112. Most spells of unemployment are long, and most unemployment observed at any given time is long-term.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

113. Data on unemployment indicate that most people who become unemployed will soon find jobs.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

114. In an ideal labor market, wages would adjust to balance the quantity of labor supplied and the quantity of labor demanded, ensuring that all workers are always fully employed.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Labor markets TOP: Wages | Employment
MSC: Definitional

115. There are always some workers without jobs, even when the overall economy is doing well.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

116. The unemployment rate never falls to zero.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

117. The unemployment rate sometimes falls to zero.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

118. One explanation for long-run unemployment is that it takes time for workers to search for the jobs that are best suited for them.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment | Job search
MSC: Definitional

119. The unemployment that results from the process of matching workers and jobs is called frictional unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

120. The unemployment that results from the process of matching workers and jobs is called structural unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

121. Frictional unemployment is often thought to explain relatively short spells of unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

122. Frictional unemployment is often thought to explain relatively long spells of unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

123. Some long-run unemployment may be explained by the fact that the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

124. The unemployment that results from the quantity of labor supplied exceeding the quantity demanded is called structural unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

125. The unemployment that results from the quantity of labor supplied exceeding the quantity demanded is called frictional unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

126. Structural unemployment is often thought to explain relatively long spells of unemployment.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

127. Structural unemployment is often thought to explain relatively short spells of unemployment.
ANS: F DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

128. Structural unemployment results when wages are, for some reason, set above the level that brings supply and demand into equilibrium.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

129. Three possible reasons for an above-equilibrium wage are minimum-wage laws, unions, and efficiency wages.
ANS: T DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

130. Every month, the Bureau of Labor Statistics surveys 160,000 business establishments to help determine the number of jobs the economy has gained or lost.
ANS: T DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Jobs number MSC: Interpretive

131. The Bureau of Labor Statistics’ household survey and establishment survey both yield the same results about total employment.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

132. The Bureau of Labor Statistics’ household survey and establishment survey both yield information about unemployment.
ANS: F DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

133. One reason economies always experience some unemployment is job search.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment | Job search
MSC: Definitional

134. Job search is the process of matching workers with appropriate jobs.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Job search
MSC: Definitional

135. If all workers and all jobs were the same such that all workers were equally well suited for all jobs, then job search would not be a problem.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Job search
MSC: Definitional

136. If all workers and all jobs were the same such that all workers were equally well suited for all jobs, then there would be no frictional unemployment.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

137. Frictional unemployment is often the result of changes in the demand for labor among different firms.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

138. The demand for labor by a certain firm fluctuates as the demand for that firm’s product fluctuates.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Labor markets TOP: Labor demand | Demand
MSC: Interpretive

139. The demand for labor by a certain firm is independent of the demand for that firm’s product.
ANS: F DIF: 2 REF: 28-2
NAT: Analytic LOC: Labor markets TOP: Labor demand | Demand
MSC: Interpretive

140. Employment can rise in one region of the country while it falls in another.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Definitional

141. Changes in the composition of demand among industries or regions are called sectoral shifts.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Sectoral shifts MSC: Definitional

142. Sectoral shifts temporarily cause unemployment.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Sectoral shifts | Unemployment MSC: Definitional

143. Sectoral shifts contribute to frictional unemployment.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Sectoral shifts | Frictional unemployment MSC: Interpretive

144. Frictional unemployment is inevitable because the economy is always changing.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

145. A century ago, the four industries with the largest employment in the United States were cotton goods, woolen goods, men’s clothing, and lumber.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Definitional

146. Today, the four industries with the largest employment in the United States are autos, aircraft, communications, and electrical components.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Definitional

147. Data show that at least 10 percent of U.S. manufacturing jobs are destroyed every year.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

148. Data show that at least 20 percent of U.S. manufacturing jobs are destroyed every year.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

149. More than 3 percent of U.S. workers leave their jobs in a typical month.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

150. More than 30 percent of U.S. workers leave their jobs in a typical month.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

151. The destruction of manufacturing jobs and workers leaving their jobs to find better ones both contribute to frictional unemployment.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

152. Public policy can reduce the economy’s natural rate of unemployment.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Natural rate of unemployment MSC: Definitional

153. Public policy cannot reduce the economy’s natural rate of unemployment.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Natural rate of unemployment MSC: Definitional

154. Public policy can reduce frictional unemployment.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment MSC: Interpretive

155. Policies that reduce the time it takes unemployed workers to find new jobs can reduce the economy’s natural rate of unemployment.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Natural rate of unemployment MSC: Definitional

156. Government-run employment agencies and public training programs both seek to reduce frictional unemployment.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment MSC: Interpretive

157. Advocates of government-run employment agencies and public training programs believe they make job search more efficient.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Job search | Efficiency MSC: Interpretive

158. Critics of government-run employment agencies and public training programs argue that the private market is better at matching workers and jobs than the government is.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Public policy | Job search
MSC: Interpretive

159. Most job search in the U.S. economy takes place without intervention by the government.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Job search
MSC: Definitional

160. Most job search in the U.S. economy takes place with the help of the government.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Job search
MSC: Definitional

161. Public policy, without intending to do so, can increase frictional unemployment.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment MSC: Interpretive

162. Unemployment insurance increases frictional unemployment.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment insurance | Frictional unemployment MSC: Definitional

163. Unemployment insurance reduces hardships of unemployment but also increases the amount of structural unemployment.
ANS: F DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment insurance | Frictional unemployment MSC: Interpretive

164. Unemployment insurance is designed to offer workers partial protection against job loss.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Definitional

165. The unemployed who quit their jobs, were fired for cause, or just entered the labor force are not eligible for unemployment insurance.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Definitional

166. The unemployed who quit their jobs, were fired for cause, or just entered the labor force are eligible for unemployment insurance.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Definitional

167. A typical American worker covered by unemployment insurance receives 50 percent of his former wages for 52 weeks.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Definitional

168. Unemployment insurance reduces the incentive for the unemployed to find and take new jobs.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment insurance | Incentives MSC: Interpretive

169. Unemployment insurance causes workers to be less likely to seek guarantees of job security when they negotiate with employers over the terms of employment.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Definitional

170. Studies have shown that the design of the unemployment insurance system reduces the job search effort of the unemployed.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Interpretive

171. Some economists have argued that unemployment insurance improves the ability of the economy to match each worker with the most appropriate job.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Unemployment insurance MSC: Definitional

172. The unemployment rate is an imperfect measure of a nation’s overall level of economic well-being.
ANS: T DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Economic well-being MSC: Definitional

173. Most economists agree that eliminating unemployment insurance would increase the amount of unemployment in the economy.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Unemployment insurance MSC: Definitional

174. Most economists agree that eliminating unemployment insurance would increase the nation’s overall level of well-being.
ANS: F DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Unemployment insurance | Economic well-being
MSC: Definitional

175. Other things the same, countries that offer more generous and longer-lasting unemployment insurance benefits are likely to have higher unemployment rates.
ANS: T DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Interpretive

176. Structural unemployment results when the number of jobs is insufficient for the number of workers.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

177. Minimum wages are the predominant reason for unemployment in the U.S. economy.
ANS: F DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Minimum wage | Unemployment MSC: Definitional

178. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Definitional

179. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it reduces the quantity of labor supplied and raises the quantity of labor demanded compared to the equilibrium level.
ANS: F DIF: 1 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Definitional

180. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, the result is a surplus of labor.
ANS: T DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

181. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, the result is a shortage of labor.
ANS: F DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

182. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, there are more workers willing to work than there are jobs, so some workers are unemployed.
ANS: T DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Minimum wage | Unemployment MSC: Interpretive

183. Minimum-wage laws are one reason there is always some unemployment in the U.S. economy.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Minimum wage | Unemployment MSC: Definitional

184. Minimum-wage laws affect all workers.
ANS: F DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

185. Most U.S. workers have wages well above the legal minimum, so minimum-wage laws do not prevent the wage from adjusting to balance supply and demand.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Definitional

186. Minimum-wage laws matter most for the least skilled and least experienced members of the labor force, such as teenagers.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Definitional

187. It is only among the least skilled and least experienced members of the labor force that minimum-wage laws cause unemployment.
ANS: T DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Minimum wage | Unemployment MSC: Interpretive

188. If the wage is kept above the equilibrium level for any reason, the result is unemployment.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Wages | Unemployment
MSC: Definitional

189. If the wage is kept above the equilibrium wage for any reason, the result is structural unemployment.
ANS: T DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Wages | Structural unemployment MSC: Interpretive

190. If the wage is kept above the equilibrium level because of minimum-wage laws, then the result is unemployment; if the wage is kept above the equilibrium level for some other reason, the result need not be unemployment.
ANS: F DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Wages | Unemployment
MSC: Interpretive

191. When job search is the explanation for unemployment, workers are searching for the jobs that best suit their tastes and skills, but when the wage is above the equilibrium level, the quantity of labor supplied exceeds the quantity of labor demanded, and workers are unemployed because they are waiting for jobs to open up.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Structural unemployment MSC: Definitional

192. U.S. Department of Labor data show that minimum-wage workers tend to be young, less educated, more likely to be working part time, and concentrated in the leisure and hospitality industry.
ANS: T DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Minimum wage
MSC: Definitional

193. A union is an employer association that bargains with workers over wages, benefits, and working conditions.
ANS: F DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Definitional

194. In the 1940s and 1950s, about one-third of U.S. workers belonged to unions, but today, only about one-fifth of U.S. workers belong to unions.
ANS: F DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

195. Today, unions play a larger role in Europe than they do in the U.S.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

196. When a union is present in a labor market, wages are not determined by the equilibrium of supply and demand.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

197. A union is a type of cartel.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Definitional

198. Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Definitional

199. The process by which unions and firms agree on the terms of employment is called collective bargaining.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | Collective bargaining MSC: Definitional

200. If a union and a firm cannot reach an agreement on the terms of employment, then the union can organize a withdrawal of labor from the firm, called a strike.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Strikes
MSC: Interpretive

201. Economists have found that union workers earn about 30 to 40 percent more than similar workers who do not belong to unions.
ANS: F DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Economists | Unions | Wages
MSC: Interpretive

202. When a union raises the wage above the equilibrium level, it reduces the quantity of labor supplied and raises the quantity of labor demanded, resulting in unemployment.
ANS: F DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Unemployment
MSC: Definitional

203. The introduction of a union into a firm benefits all of that firm’s workers.
ANS: F DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

204. Some of a firm’s workers are made worse off by the introduction of a union.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

205. Unions are often thought to cause conflict between different groups of workers -- between the insiders who benefit from high union wages and the outsiders who do not get the union jobs.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

206. When unions raise wages in one part of the economy, the supply of labor increases in other parts of the economy, which reduces wages in industries that are not unionized.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

207. Workers in unions reap the benefit of collective bargaining, while workers not in unions bear some of the cost.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Definitional

208. Unions are exempt from U.S. antitrust laws.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Antitrust laws
MSC: Definitional

209. In the U.S., it is illegal for employers to interfere when workers try to organize unions.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

210. In the U.S., the National Labor Relations Board is the government agency that enforces workers’ right to unionize.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | National Labor Relations Board MSC: Definitional

211. Right-to-work laws give workers in a unionized firm the right to choose whether to join the union.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Right-to-work laws
MSC: Definitional

212. Right-to-work laws allow striking union members to be permanently replaced.
ANS: F DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Right-to-work laws
MSC: Interpretive

213. Most economists believe unions are bad for the economy as a whole.
ANS: F DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Economists | Unions
MSC: Interpretive

214. Critics of unions argue that unions cause the allocation of labor to be inefficient and inequitable.
ANS: T DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | Efficiency | Equality MSC: Interpretive

215. Advocates of unions contend that unions are a necessary antidote to the market power of the firms that hire workers and that unions are important for helping firms respond efficiently to workers’ concerns.
ANS: T DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Definitional

216. According to the theory of efficiency wages, firms operate more efficiently if wages are above the equilibrium level.
ANS: T DIF: 1 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Definitional

217. According to the theory of efficiency wages, firms operate more efficiently if wages are below the equilibrium level.
ANS: F DIF: 1 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Definitional

218. According to the theory of efficiency wages, it may be profitable for firms to keep wages high even in the presence of a surplus of labor.
ANS: T DIF: 1 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Definitional

219. Efficiency wages create structural unemployment.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Structural unemployment MSC: Interpretive

220. A firm might offer efficiency wages so its workers will eat a more nutritious diet and therefore be healthier and more productive.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker health MSC: Interpretive

221. The efficiency-wage theory of worker health is more relevant for explaining unemployment in less developed countries than in rich countries.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker health MSC: Interpretive

222. A firm might offer efficiency wages to reduce worker turnover and thereby reduce production costs.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker turnover MSC: Interpretive

223. A firm might offer efficiency wages in order to attract a better pool of applicants.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker quality MSC: Interpretive

224. A firm might offer efficiency wages in order to reduce shirking.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker effort MSC: Interpretive

225. In 1914, Henry Ford began paying his workers $5 per day, about twice the going wage. As a result, turnover and absenteeism fell and productivity and profits rose.
ANS: T DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

SHORT ANSWER

1. The table below uses data for the year 2003 provided by the Bureau of Labor Statistics and adjusted to be comparable to U.S. data. All values are in thousands. Fill in the blank entries in the table.

| | | | | | |Labor-Force |
|Country |Adult |Labor |Employed |Unemployed |Unemployment |Participation |
| |Population |Force | | |Rate |Rate |
|Japan |109,474 | |62,510 |3,500 | | |
|France | |26,870 | |2,577 | |57.41 |
|Germany | 70,159 |39,591 | | | 9.69 | |

ANS:
| | | | | | |Labor-Force |
|Country |Adult |Labor |Employed |Unemployed |Unemployment |Participation |
| |Population |Force | | |Rate |Rate |
|Japan |109,474 |66,010 |62,510 |3,500 |5.30 |60.30 |
|France |46,804 |26,870 |24,293 |2,577 |9.59 |57.41 |
|Germany |70,159 |39,591 |35,755 |3,836 | 9.69 |56.43 |

DIF: 2 REF: 28-1 NAT: Analytic
LOC: Unemployment and inflation TOP: Labor-force participation rate | Unemployment rate
MSC: Applicative

2. Following the recession of 2001, there was a month in which employment and the unemployment rate both rose. Assuming the computations were correct, how is it possible for both to have increased?
ANS:
The rate of unemployment is measured as the number of people unemployed divided by the labor force. If the number of people in the labor force rises, but a significant portion of the rise in the labor force is people who are unemployed, then both employment and unemployment could rise.

(This likely happened because as the economy was improving, more people began seeking employment, but not all immediately found employment.)

DIF: 3 REF: 28-1 NAT: Analytic
LOC: Unemployment and inflation TOP: Employment | Unemployment rate
MSC: Analytical

3. Why have labor-force participation rates for women in the United States increased since World War II while labor-force participation rates for men have decreased?
ANS:
Causes of the increase in the U.S. women’s labor-force participation rate over the past several decades include new technologies that have reduced the amount of time required to complete routine household tasks, improved birth control, and changing political and social attitudes. Causes of the decline in the U.S. men’s labor-force participation rate over the past several decades include young men now staying in school longer than their fathers and grandfathers did, older men now retiring earlier and living longer, and more fathers now staying at home to raise their children.

DIF: 2 REF: 28-1 NAT: Analytic
LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

4. Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?
ANS:
Most unemployed people in the economy are unemployed for relatively short periods of time, while fewer people are unemployed for relatively long periods of time. If you were to total the weeks spent unemployed, most of those weeks would be accounted for by people who had been unemployed a long time.

DIF: 2 REF: 28-1 NAT: Analytic
LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

5. Why might a favorable change in the economy, such as technological improvement or a decrease in the price of imported oil, be associated with an increase in frictional unemployment?
ANS:
Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand for labor among different firms. For example, a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Similarly, technological progress makes some industries decline and others advance, creating frictional unemployment.

DIF: 2 REF: 28-2 NAT: Analytic
LOC: Unemployment and inflation TOP: Frictional unemployment | Sectoral shifts
MSC: Interpretive

6. Teenage unemployment is higher than unemployment of people ages 20 and over. Explain why economists would attribute at least part of this difference to minimum-wage laws.
ANS:
People who are experienced and educated are likely to find jobs where the equilibrium wage is above the minimum wage. In labor markets where the equilibrium wage is above the minimum wage, the minimum wage does not create unemployment. Since people ages 20 and over tend to have more experience and education than teenagers, the minimum wage matters less and so creates less unemployment.

DIF: 2 REF: 28-3 NAT: Analytic
LOC: Unemployment and inflation TOP: Minimum wage | Unemployment
MSC: Interpretive

7. Since unemployment rates are consistently higher in Canada and some Western European countries than in the United States, it appears that the natural rate of unemployment is lower in the United States. What might explain this difference?
ANS:
The text offers two explanations for the natural rate of unemployment. The first is frictional unemployment, which results from people and employers taking time to search for the best match. Frictional unemployment would be higher in countries that have frequent and large sectoral shifts and generous unemployment compensation. It seems unlikely that Canada and Western European countries would have greater sectoral shifts than the United States, so some of the difference might be due to more generous unemployment compensation in Canada and Western Europe.

The second explanation for the natural rate of unemployment is that wages in some labor markets are above equilibrium. One rationale for setting wages above equilibrium is to attract and retain productive workers. There is no obvious reason why these efficiency wages should contribute to unemployment more in Canada and Western Europe than in the United States. Wages can also be above equilibrium in some markets because of minimum-wage laws. So, some unemployment in Canada and Western Europe might result from higher minimum wages. Finally, unions may negotiate higher wages for their members causing a rise in unemployment. Possibly, Canada and Western Europe have greater union membership rates or more powerful unions.

DIF: 2 REF: 28-5 NAT: Analytic
LOC: Unemployment and inflation TOP: Natural rate of unemployment
MSC: Interpretive

8. Suppose that there is an excess supply of economics professors. Should universities necessarily reduce salaries? What does standard economic theory suggest? What does efficiency-wage theory suggest?
ANS:
Standard economic theory suggests that if universities are interested in maximizing profits or minimizing costs, they should reduce salaries until the quantity supplied of workers is equal to the quantity demanded. The reduction in wages would reduce the costs of production and raise profits while still allowing universities to fill faculty positions.

Efficiency-wage theory suggests that it might be profitable for universities to keep wages above the equilibrium level in order to reduce worker turnover, increase worker quality, increase worker effort (reduce shirking) and therefore worker productivity. (Fortunately, salaries of economics professors are usually a bit above what is necessary to eat nutritious diets, so the worker-health variant of the efficiency wage is not likely to be important here.)

DIF: 2 REF: 28-5 NAT: Analytic
LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

9. What is the theory of efficiency wages? Provide four reasons that employers might pay efficiency wages.
ANS:
According to the theory of efficiency wages, firms operate more efficiently if wages are above the equilibrium level. Therefore, it may be profitable for firms to keep wages high even in the presence of an excess supply of labor. If so, firms will keep wages above the equilibrium level, creating unemployment.

(1) Worker Health:
Better-paid workers eat a more nutritious diet, and workers who eat a better diet are healthier and more productive. A firm may find it profitable to pay higher wages in order to have healthier, more productive workers.

(2) Worker Turnover:
The more a firm pays its workers, the less often its workers choose to leave the firm. Since it is costly to hire and train new workers, it may be profitable for an employer to pay higher than equilibrium wages in order to reduce worker turnover rates.

(3) Worker Effort:
In jobs where workers have some discretion over how hard they work, workers may shirk. As a result, firms monitor the effort of their workers, and those caught shirking are fired. However, it is costly to monitor workers, and monitoring is often imperfect. By paying higher wages, firms make it more expensive for workers to shirk, since if they are caught they will not readily find other employment at their current wage. It may be profitable for a firm to pay higher than market wages in order to reduce shirking.

(4) Worker Quality:
When a firm hires new workers, it cannot perfectly gauge the quality of the applicants. By paying a higher wage, the firm attracts a better pool of workers to apply for its jobs. It may be profitable for a firm to pay higher than market wages in order to increase the probability that it will hire good-quality workers.

DIF: 2 REF: 28-5 NAT: Analytic
LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive
Sec00 - Unemployment

MULTIPLE CHOICE

1. To maintain their standard of living, most people rely on
|a. |government assistance. |
|b. |their personal savings. |
|c. |their labor earnings. |
|d. |rental income. |

ANS: C DIF: 1 REF: 28-0
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Income | Standard of living MSC: Definitional

2. Which of the following is correct?
|a. |The amount of unemployment that a country typically experiences is a determinant of that country's standard of living, |
| |and some degree of unemployment is inevitable in a complex economy. |
|b. |The amount of unemployment that a country typically experiences is a determinant of that country's standard of living, |
| |and a complex economy can achieve zero unemployment. |
|c. |The amount of unemployment that a country typically experiences is not a determinant of that country's standard of |
| |living, and a complex economy can achieve zero unemployment. |
|d. |The amount of unemployment that a country typically experiences is not a determinant of that country's standard of |
| |living, and some degree of unemployment is inevitable in a complex economy. |

ANS: A DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Standard of living MSC: Interpretive

3. The amount of unemployment varies
|a. |little over time and across countries. |
|b. |little over time, but substantially across countries. |
|c. |substantially over time, but little across countries. |
|d. |substantially over time and across countries. |

ANS: D DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

4. The amount of unemployment that an economy normally experiences is called the
|a. |average rate of unemployment. |
|b. |natural rate of unemployment. |
|c. |cyclical rate of unemployment. |
|d. |typical rate of unemployment. |

ANS: B DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

5. An economy’s natural rate of unemployment is
|a. |the economy’s long-run target level of unemployment. |
|b. |the amount of unemployment that the economy normally experiences. |
|c. |the lowest rate of unemployment the economy can achieve. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

6. The natural rate of unemployment is the
|a. |unemployment rate that would prevail with zero inflation. |
|b. |rate associated with the highest possible level of GDP. |
|c. |difference between the long-run and short-run unemployment rates. |
|d. |amount of unemployment that the economy normally experiences. |

ANS: D DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

7. The deviation of unemployment from its natural rate is called
|a. |the unnatural rate of unemployment. |
|b. |structural unemployment. |
|c. |frictional unemployment. |
|d. |cyclical unemployment. |

ANS: D DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Definitional

8. Cyclical unemployment refers to
|a. |the relationship between the probability of unemployment and a worker's changing level of experience. |
|b. |how often a worker is likely to be employed during her lifetime. |
|c. |year-to-year fluctuations of unemployment around its natural rate. |
|d. |long-term trends in unemployment. |

ANS: C DIF: 1 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Definitional

9. Cyclical unemployment
|a. |has a different explanation than does the natural rate of unemployment. |
|b. |refers to the year-to-year fluctuation in unemployment around an economy’s natural rate of unemployment. |
|c. |is closely associated with short-run ups and downs of economic activity. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Interpretive

10. Cyclical unemployment is closely associated with
|a. |long-term economic growth. |
|b. |short-run ups and downs of the economy. |
|c. |fluctuations in the natural rate of unemployment. |
|d. |changes in the minimum wage. |

ANS: B DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Interpretive

11. The designation "natural" implies that the natural rate of unemployment
|a. |is desirable. |
|b. |is constant over time. |
|c. |is impervious to economic policy. |
|d. |does not go away on its own even in the long run. |

ANS: D DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

12. The natural rate of unemployment
|a. |is the economy’s desirable level of unemployment. |
|b. |cannot be affected by economic policy. |
|c. |Both (a) and (b) are correct. |
|d. |None of the above is correct. |

ANS: D DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

13. The natural rate of unemployment
|a. |arises from a single problem that has a single solution. |
|b. |is easy for policymakers to reduce. |
|c. |Both (a) and (b) are correct. |
|d. |None of the above is correct. |

ANS: D DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

14. The natural rate of unemployment
|a. |is a constant. |
|b. |is the desirable rate of unemployment. |
|c. |cannot be altered by economic policy. |
|d. |None of the above is correct. |

ANS: D DIF: 2 REF: 28-0
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

Sec01 - Unemployment - Identifying Unemployment

MULTIPLE CHOICE

1. Measuring unemployment is the job of the
|a. |Congressional Budget Office. |
|b. |Department of Commerce. |
|c. |Council of Economic Advisers. |
|d. |Bureau of Labor Statistics. |

ANS: D DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

2. The Bureau of Labor Statistics is part of the U.S. Department of
|a. |the Treasury. |
|b. |Commerce. |
|c. |Labor. |
|d. |the Interior. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics MSC: Definitional

3. The Bureau of Labor Statistics produces data on unemployment
|a. |weekly. |
|b. |monthly. |
|c. |quarterly. |
|d. |yearly. |

ANS: B DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

4. The Bureau of Labor Statistics produces data on
|a. |unemployment. |
|b. |types of employment. |
|c. |length of the average workweek. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Interpretive

5. The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about
|a. |600 households. |
|b. |6,000 households. |
|c. |60,000 households. |
|d. |6,000,000 households. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

6. The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about 60,000 households, called the
|a. |Census. |
|b. |Labor Survey. |
|c. |Survey of Economic Indicators. |
|d. |Current Population Survey. |

ANS: D DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

7. Unemployment data are collected
|a. |from unemployment insurance claims. |
|b. |through a regular survey of about 60,000 households. |
|c. |through a regular survey of about 200,000 firms. |
|d. |Unemployment data are collected using all of the above. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

8. Which of the following is not one of the categories into which the Bureau of Labor Statistics places each adult of each surveyed household?
|a. |employed |
|b. |unemployed |
|c. |underemployed |
|d. |not in the labor force |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Bureau of Labor Statistics
MSC: Definitional

9. The Bureau of Labor Statistics counts a member of a surveyed household as an adult if that person is at least
|a. |14 years old. |
|b. |16 years old. |
|c. |18 years old. |
|d. |21 years old. |

ANS: B DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics MSC: Definitional

10. Who of the following is not included in the Bureau of Labor Statistics' “employed” category?
|a. |those who worked as paid employees |
|b. |those who worked in their own business |
|c. |those who worked as unpaid workers in a family member's business |
|d. |those waiting to be recalled to a job from which they had been laid off |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

11. The Bureau of Labor Statistics places people in the “employed” category if they
|a. |are without a job, but are available for work and have tried to find a job during the previous 4 weeks. |
|b. |work without pay in a family member’s business. |
|c. |are waiting to be recalled to a job from which they had been laid off. |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

12. The Bureau of Labor Statistics places people in the “employed” category if they
|a. |are temporarily absent from their jobs. |
|b. |are self-employed. |
|c. |work without pay in a family member’s business. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

13. Who of the following are included in the Bureau of Labor Statistics’ “employed” category?
|a. |certain unpaid workers |
|b. |part-time workers |
|c. |workers on vacation |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

14. Egzon is working part-time. Dijana is on temporary layoff. Who is included in the Bureau of Labor Statistics’ “employed” category?
|a. |only Egzon |
|b. |only Dijana |
|c. |both Egzon and Dijana |
|d. |neither Egzon nor Dijana |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

15. Adelina owns her own business. Odilon is an unpaid worker in his family’s business. Who is included in the Bureau of Labor Statistics’ “employed” category?
|a. |only Adelina |
|b. |only Odilon |
|c. |both Adelina and Odilon |
|d. |neither Adelina nor Odilon |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Employment MSC: Interpretive

16. For the Bureau of Labor Statistics to place someone in the “unemployed” category, that person must
|a. |be available for work. |
|b. |have tried to find employment during the previous week. |
|c. |have previously been employed. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

17. For the Bureau of Labor Statistics to place someone in the “unemployed” category, that person must
|a. |have worked 10 or fewer hours during the previous week. |
|b. |have tried to find employment during the previous year. |
|c. |not have been laid off. |
|d. |None of the above is correct. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

18. Which of the following is not a requirement for the Bureau of Labor Statistics to place someone in the “unemployed” category?
|a. |The person must not have been employed. |
|b. |The person must not have been fired from their previous job. |
|c. |The person must have tried to find employment during the previous 4 weeks. |
|d. |The person must have been available for work. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

19. Who of the following would be included in the Bureau of Labor Statistics’ “unemployed” category?
|a. |Tuuli, who is waiting for her new job to start |
|b. |Jyri, who worked only 15 hours last week |
|c. |Panu, who neither has a job nor is looking for one |
|d. |None of the above is correct. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

20. Who of the following would be included in the Bureau of Labor Statistics’ “unemployed” category?
|a. |Cemal, a full-time student who is not looking for work |
|b. |Halim, who is on temporary layoff |
|c. |Zeynep, who has retired and is not looking for work |
|d. |All of the above are correct. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Interpretive

21. Who of the following would necessarily be included in the Bureau of Labor Statistics’ “unemployed” category?
|a. |Anique, who did not work during the previous 4 weeks |
|b. |Evelien, who tried to find new employment during the previous 4 weeks |
|c. |Renate, who was an unpaid worker during the previous 4 weeks |
|d. |None of the above is correct. |

ANS: D DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment MSC: Analytical

22. Who is included in the labor force by the Bureau of Labor Statistics?
|a. |Azibo, a homemaker not looking for other work |
|b. |Kwamie, a full-time student not looking for work |
|c. |Geroy, who does not have a job, but is looking for work |
|d. |None of the above is correct. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor force MSC: Interpretive

23. Who is included in the labor force by the Bureau of Labor Statistics?
|a. |Aibne, who works most of the week in a steel factory |
|b. |Modlen, who is waiting for her new job at the bank to start |
|c. |Wyclef, who does not have a job, but is looking for work |
|d. |All of the above are included in the labor force. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor force MSC: Interpretive

24. Who is not included in the labor force by the Bureau of Labor Statistics?
|a. |Kawanari, who is on temporary layoff |
|b. |Takuji, who has retired and is not looking for work |
|c. |Izumi, who does not have a job, but has applied for several in the last week |
|d. |None of the above is correct. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor force MSC: Interpretive

25. Acarapi is a full-time homemaker not currently searching for other work. Ximena is a full-time student who is not looking for a job. Who is included in the labor force by the Bureau of Labor Statistics?
|a. |only Acarapi |
|b. |only Ximena |
|c. |both Acarapi and Ximena |
|d. |neither Acarapi nor Ximena |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Labor force MSC: Interpretive

26. A person who is counted as unemployed by the Bureau of Labor Statistics
|a. |is also in the labor force. |
|b. |must have recently looked for work or be on temporary layoff. |
|c. |be at least 16 years old. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment | Labor force MSC: Interpretive

27. Pekelo owns his own business. The Bureau of Labor Statistics counts Pekelo as
|a. |unemployed and in the labor force. |
|b. |unemployed and not in the labor force. |
|c. |employed and in the labor force. |
|d. |employed and not in the labor force. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Employment | Labor force MSC: Interpretive

28. Yves is an unpaid worker in his family’s bakery. The Bureau of Labor Statistics counts Yves as
|a. |unemployed and in the labor force. |
|b. |unemployed and not in the labor force. |
|c. |employed and in the labor force. |
|d. |employed and not in the labor force. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Employment | Labor force MSC: Interpretive

29. Eponine works part-time as a babysitter. The Bureau of Labor Statistics counts Eponine as
|a. |unemployed and in the labor force. |
|b. |unemployed and not in the labor force. |
|c. |employed and in the labor force. |
|d. |employed and not in the labor force. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Employment | Labor force MSC: Interpretive

30. Ipo did not work last week because flooding forced an evacuation of her workplace. The Bureau of Labor Statistics counts Ipo as
|a. |unemployed and in the labor force. |
|b. |unemployed and not in the labor force. |
|c. |employed and in the labor force. |
|d. |employed and not in the labor force. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Employment | Labor force MSC: Interpretive

31. Jouke is on a temporary layoff from his factory job. The Bureau of Labor Statistics counts Jouke as
|a. |unemployed and in the labor force. |
|b. |unemployed and not in the labor force. |
|c. |employed and in the labor force. |
|d. |employed and not in the labor force. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment | Labor force MSC: Interpretive

32. Jai Li just lost her job, and she hasn’t yet started looking for a new one. The Bureau of Labor Statistics counts Jai Li as
|a. |unemployed and in the labor force. |
|b. |unemployed, but not in the labor force. |
|c. |in the labor force, but not unemployed. |
|d. |neither in the labor force nor unemployed. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment | Labor force MSC: Interpretive

33. Zeeman is a college student who is not working or looking for a job. The Bureau of Labor Statistics counts Zeeman as
|a. |unemployed and in the labor force. |
|b. |unemployed, but not in the labor force. |
|c. |in the labor force, but not unemployed. |
|d. |neither in the labor force nor unemployed. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment | Labor force MSC: Interpretive

34. Neeltje is an unpaid homemaker who works as a volunteer at the local Red Cross and is currently not looking for a paid job. The Bureau of Labor Statistics counts Neeltje as
|a. |unemployed and in the labor force. |
|b. |unemployed, but not in the labor force. |
|c. |in the labor force, but not unemployed. |
|d. |neither in the labor force nor unemployed. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Unemployment | Labor force MSC: Interpretive

35. The sum of which of the following must be equal to the adult population?
|a. |employed, unemployed |
|b. |employed, unemployed, labor force |
|c. |employed, unemployed, not in the labor force |
|d. |employed, unemployed, labor force, not in the labor force |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Interpretive

36. The labor force equals the
|a. |number of people employed. |
|b. |number of people unemployed. |
|c. |number of people employed plus the number of people unemployed. |
|d. |adult population. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Definitional

37. Suppose that a large number of men who used to work or seek work now no longer do either. Other things the same, this makes
|a. |the number of people unemployed rise but does not change the labor force. |
|b. |the number of people unemployed rise but makes the labor force fall. |
|c. |both the number of people unemployed and the labor force fall. |
|d. |the number of people unemployed fall but does not change the labor force. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment | Labor force
MSC: Interpretive

38. The Bureau of Labor Statistics defines the unemployment rate as the percentage of
|a. |those unemployed relative to those employed. |
|b. |the labor force that is unemployed. |
|c. |the adult population that is unemployed. |
|d. |the adult population that is unemployed or not in the labor force. |

ANS: B DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

39. The unemployment rate is computed as the number of unemployed
|a. |divided by the labor force, all times 100. |
|b. |divided by the number of employed, all times 100. |
|c. |divided by the adult population, all times 100. |
|d. |times the labor-force participation rate, all times 100. |

ANS: A DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

40. Which of the following is correct?
|a. |Labor force = number of employed. |
|b. |Labor force = population - number of unemployed. |
|c. |Unemployment Rate = number of unemployed [pic] (number of employed + number of unemployed) [pic] 100. |
|d. |Unemployment Rate = number of unemployed [pic] adult population [pic] 100. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor force MSC: Interpretive

41. The labor-force participation rate measures the percentage of the
|a. |total adult population that is in the labor force. |
|b. |total adult population that is employed. |
|c. |labor force that is employed. |
|d. |labor force that is either employed or unemployed. |

ANS: A DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

42. The labor-force participation rate tells us the fraction of the population that
|a. |is able to participate in the labor market. |
|b. |has ever been employed. |
|c. |has chosen to participate in the labor market. |
|d. |has chosen not to participate in the labor market. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

43. The labor-force participation rate is computed as
|a. |(Employed [pic] Adult Population) [pic] 100. |
|b. |(Employed [pic] Labor Force) [pic] 100. |
|c. |(Labor Force [pic] Adult Population) [pic] 100. |
|d. |(Adult Population [pic] Labor Force) [pic] 100. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

44. Satchel loses his job and immediately begins looking for another. Other things the same, the unemployment rate
|a. |increases and the labor-force participation rate decreases. |
|b. |and the labor-force participation rate both increase. |
|c. |increases and the labor-force participation rate is unaffected. |
|d. |is unaffected and the labor-force participation rate decreases. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Interpretive

45. Matilda just graduated from college. In order to devote all her efforts to college, she didn’t hold a job. She is going to cruise around the country on her motorcycle for a month before she starts looking for work. Other things the same, the unemployment rate
|a. |increases and the labor-force participation rate decreases. |
|b. |and the labor-force participation rate both increase. |
|c. |increases and the labor-force participation rate is unaffected. |
|d. |and the labor-force participation rate are both unaffected. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Interpretive

46. Sheamous loses his job and decides to sit on the beach rather than look for work during the next few months. Other things the same, the unemployment rate
|a. |increases and the labor-force participation rate decreases. |
|b. |increases and the labor-force participation rate is unaffected. |
|c. |is unaffected and the labor-force participation rate decreases. |
|d. |and the labor-force participation rate are both unaffected. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Interpretive

47. Sirius has just finished high school and started looking for his first job, but has not yet found one. Other things the same, the unemployment rate
|a. |and the labor-force participation rate both increase. |
|b. |increases and the labor-force participation rate is unaffected. |
|c. |is unaffected and the labor-force participation rate increases. |
|d. |and the labor-force participation rate are both unaffected. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Interpretive

48. If an unemployed person quits looking for work, then, other things the same, the unemployment rate
|a. |decreases and the labor-force participation rate is unaffected. |
|b. |and the labor-force participation rate both decrease. |
|c. |is unaffected and the labor-force participation rate decreases. |
|d. |and the labor-force participation rate are both unaffected. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Interpretive

49. President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that
|a. |one of them must be lying. |
|b. |both of them could be telling the truth if the labor force and employment grew at the exact same rate. |
|c. |both of them could be telling the truth if the labor force grew slower than employment. |
|d. |both of them could be telling the truth if the labor force grew faster than employment. |

ANS: D DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Employment | Unemployment rate MSC: Analytical

Table 28-1

Labor Data for Wrexington

|Year |2004 |2005 |2006 |
|Adult population |2000 |3000 |3200 |
|Number of employed |1400 |1300 |1600 |
|Number of unemployed |200 |600 |200 |

50. Refer to Table 28-1. The labor force of Wrexington in 2004 was
|a. |1400. |
|b. |1600. |
|c. |1800. |
|d. |2000. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

51. Refer to Table 28-1. The labor force of Wrexington in 2005 was
|a. |1300. |
|b. |1900. |
|c. |2400. |
|d. |3000. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

52. Refer to Table 28-1. The labor force of Wrexington in 2006 was
|a. |1600. |
|b. |1800. |
|c. |3000. |
|d. |3200. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

53. Refer to Table 28-1. The labor force of Wrexington
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

54. Refer to Table 28-1. The number of adults not in the labor force of Wrexington in 2004 was
|a. |200. |
|b. |400. |
|c. |600. |
|d. |1800. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

55. Refer to Table 28-1. The number of adults not in the labor force of Wrexington in 2005 was
|a. |600. |
|b. |1100. |
|c. |1700. |
|d. |2400. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

56. Refer to Table 28-1. The number of adults not in the labor force of Wrexington in 2006 was
|a. |200. |
|b. |1400. |
|c. |1600. |
|d. |3000. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

57. Refer to Table 28-1. The number of adults not in the labor force of Wrexington
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

58. Refer to Table 28-1. The unemployment rate of Wrexington in 2004 was
|a. |10%. |
|b. |12.5%. |
|c. |14.3%. |
|d. |80%. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

59. Refer to Table 28-1. The unemployment rate of Wrexington in 2005 was
|a. |20%. |
|b. |31.6%. |
|c. |46.2%. |
|d. |63.3%. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

60. Refer to Table 28-1. The unemployment rate of Wrexington in 2006 was
|a. |6.25%. |
|b. |11.1%. |
|c. |12.5%. |
|d. |56.25%. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

61. Refer to Table 28-1. The unemployment rate of Wrexington
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

62. Refer to Table 28-1. The labor-force participation rate of Wrexington in 2004 was
|a. |70%. |
|b. |77.8%. |
|c. |80%. |
|d. |87.5%. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

63. Refer to Table 28-1. The labor-force participation rate of Wrexington in 2005 was
|a. |43.3%. |
|b. |54.2%. |
|c. |63.3%. |
|d. |68.4%. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

64. Refer to Table 28-1. The labor-force participation rate of Wrexington in 2006 was
|a. |50%. |
|b. |53.3%. |
|c. |56.25%. |
|d. |88.9%. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

65. Refer to Table 28-1. The labor-force participation rate of Wrexington
|a. |increased from 2004 to 2005 and increased from 2005 to 2006. |
|b. |increased from 2004 to 2005 and decreased from 2005 to 2006. |
|c. |decreased from 2004 to 2005 and increased from 2005 to 2006. |
|d. |decreased from 2004 to 2005 and decreased from 2005 to 2006. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

Table 28-2

2009 Labor Data for Wrexington

|Number of adults |20,000 |
|Number of adults who are paid employees |8,000 |
|Number of adults who work in their own businesses |1,600 |
|Number of adults who are unpaid workers in a family member’s business |1,000 |
|Number of adults who were temporarily absent from their jobs because of an earthquake |400 |
|Number of adults who were waiting to be recalled to a job from which they had been laid off |200 |
|Number of adults who do not have a job, are available for work, and have tried to find a job within the past four |1,400 |
|weeks | |
|Number of adults who do not have a job, are available for work, but have not tried to find a job within the past four|780 |
|weeks | |
|Number of adults who are full-time students |3,000 |
|Number of adults who are homemakers or retirees |3,620 |

66. Refer to Table 28-2. How many people were employed in Wrexington in 2009?
|a. |9,600 |
|b. |10,600 |
|c. |11,000 |
|d. |11,200 |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Applicative

67. Refer to Table 28-2. How many people were unemployed in Wrexington in 2009?
|a. |1,400 |
|b. |1,600 |
|c. |2,000 |
|d. |2,780 |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Applicative

68. Refer to Table 28-2. How many people were in Wrexington’s labor force in 2009?
|a. |11,000 |
|b. |12,600 |
|c. |13,380 |
|d. |20,000 |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

69. Refer to Table 28-2. How many people were not in Wrexington’s labor force in 2009?
|a. |4,400 |
|b. |6,620 |
|c. |7,400 |
|d. |8,690 |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

70. Refer to Table 28-2. What was Wrexington’s unemployment rate in 2009?
|a. |8.0 percent |
|b. |12.7 percent |
|c. |15.9 percent |
|d. |22.1 percent |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

71. Refer to Table 28-2. What was Wrexington’s labor-force participation rate in 2009?
|a. |55 percent |
|b. |63 percent |
|c. |66.9 percent |
|d. |87.3 percent |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

72. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Canadian adult non-institutionalized population was 25.022 million, the labor force was 16.956 million, and the number of people employed was 15.864 million. According to these numbers, the Canadian labor-force participation rate and unemployment rate were about
|a. |63.4% and 4.4%. |
|b. |63.4% and 6.4%. |
|c. |67.8% and 4.4%. |
|d. |67.8% and 6.4%. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

73. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Japanese adult non-institutionalized population was 109.684 million, the labor force was 65.760 million, and the number of people employed was 62.630 million. According to these numbers, the Japanese labor-force participation rate and unemployment rate were about
|a. |57.1% and 2.9%. |
|b. |57.1% and 4.8%. |
|c. |60% and 2.9%. |
|d. |60% and 4.8%. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

74. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Italian adult non-institutionalized population was 45.020 million, the labor force was 24.065 million, and the number of people employed was 22.105 million. According to these numbers, the Italian labor-force participation rate and unemployment rate were about
|a. |49.1% and 4.4%. |
|b. |49.1% and 8.1%. |
|c. |53.5% and 4.4%. |
|d. |53.5% and 8.1%. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

75. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Swedish adult non-institutionalized population was 6.712 million, the labor force was 4.576 million, and the number of people employed was 4.276 million. According to these numbers, the Swedish labor-force participation rate and unemployment rate were about
|a. |63.7% and 4.5%. |
|b. |63.7% and 6.6%. |
|c. |68.2% and 4.5%. |
|d. |68.2% and 6.6%. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

76. The Bureau of Labor Statistics reported in 2005 that there were 53.23 million people over age 25 who had at least a bachelor’s degree, 40.59 million of whom were employed and .98 million of whom were unemployed. What were the labor-force participation rate and the unemployment rate for this group?
|a. |76.3% and 1.8% |
|b. |76.3% and 2.4% |
|c. |78.1% and 1.8% |
|d. |78.1% and 2.4% |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

77. The Bureau of Labor Statistics reported in 2005 that there were 50.40 million people over age 25 whose highest level of education was some college or an associate degree, 33.86 million of whom were employed and 1.27 million of whom were unemployed. What were the labor-force participation rate and the unemployment rate for this group?
|a. |67.2% and 2.5% |
|b. |67.2% and 3.6% |
|c. |69.7% and 2.5% |
|d. |69.7% and 3.6% |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

78. The Bureau of Labor Statistics reported in 2005 that there were 59.98 million people over age 25 whose highest level of education was a high school degree or equivalent, 36.40 million of whom were employed and 1.93 million of whom were unemployed. What were the labor-force participation rate and the unemployment rate for this group?
|a. |60.7% and 3.2% |
|b. |60.7% and 5.0% |
|c. |63.9% and 3.2% |
|d. |63.9% and 5.0% |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

79. The Bureau of Labor Statistics reported in 2005 that there were 28.19 million people over age 25 who had no high school degree or its equivalent, 11.73 million of whom were employed and 1.04 million of whom were unemployed. What were the labor-force participation rate and the unemployment rate for this group?
|a. |41.6% and 3.7% |
|b. |41.6% and 8.1% |
|c. |45.3% and 3.7% |
|d. |45.3% and 8.1% |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Applicative

80. Suppose that the adult population is 4 million, the number of unemployed is 0.25 million, and the labor-force participation rate is 75%. What is the unemployment rate?
|a. |6.25% |
|b. |8.3% |
|c. |9.1% |
|d. |18.75% |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Analytical

81. Suppose that the adult population is 6 million, the number of employed is 3.8 million, and the labor-force participation rate is 70%. What is the unemployment rate?
|a. |6.7% |
|b. |9.5% |
|c. |10.5% |
|d. |28% |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Analytical

82. Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed?
|a. |1.5 million |
|b. |28.5 million |
|c. |30 million |
|d. |47.5 million |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Analytical

83. Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were unemployed?
|a. |1.425 million |
|b. |1.5 million |
|c. |2.5 million |
|d. |5 million |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Analytical

84. Suppose some country had an adult population of about 25 million, a labor-force participation rate of 60 percent, and an unemployment rate of 6 percent. How many people were employed?
|a. |0.9 million |
|b. |14.1 million |
|c. |15 million |
|d. |23.5 million |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Analytical

85. Suppose some country had an adult population of about 25 million, a labor-force participation rate of 60 percent, and an unemployment rate of 6 percent. How many people were unemployed?
|a. |0.846 million |
|b. |0.9 million |
|c. |1.5 million |
|d. |6 million |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Analytical

86. Suppose some country had an adult population of about 46 million, a labor-force participation rate of 75 percent, and an unemployment rate of 8 percent. How many people were employed?
|a. |2.76 million |
|b. |31.74 million |
|c. |34.5 million |
|d. |42.32 million |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Analytical

87. Suppose some country had an adult population of about 46 million, a labor-force participation rate of 75 percent, and an unemployment rate of 8 percent. How many people were unemployed?
|a. |2.54 million |
|b. |2.76 million |
|c. |3.68 million |
|d. |8 million |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Analytical

88. Which of the following is correct for people ages 20 and over?
|a. |Men have lower rates of labor-force participation and similar rates of unemployment compared to women. |
|b. |Men have lower rates of labor-force participation and higher rates of unemployment compared to women. |
|c. |Women have lower rates of labor-force participation and higher rates of unemployment compared to men. |
|d. |Women have lower rates of labor-force participation and similar rates of unemployment compared to men. |

ANS: D DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Definitional

89. Which of the following is correct for people ages 20 and over?
|a. |Blacks have higher rates of labor-force participation and lower rates of unemployment compared to whites. |
|b. |Blacks have higher rates of labor-force participation and higher rates of unemployment compared to whites. |
|c. |Blacks have similar rates of labor-force participation and lower rates of unemployment compared to whites. |
|d. |Blacks have similar rates of labor-force participation and higher rates of unemployment compared to whites. |

ANS: D DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Definitional

90. Which of the following is correct?
|a. |Adults have higher labor-force participation rates and higher rates of unemployment compared to teenagers. |
|b. |Adults have higher labor-force participation rates and lower rates of unemployment compared to teenagers. |
|c. |Adults have lower labor-force participation rates and lower rates of unemployment compared to teenagers. |
|d. |Adults have lower labor-force participation rates and higher rates of unemployment compared to teenagers. |

ANS: B DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Labor-force participation rate | Unemployment rate MSC: Definitional

91. According to 2007 data on the U.S. population, which of the following groups of adults (ages 20 and older) has the highest labor-force participation rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

92. According to 2007 data on the U.S. population, which of the following groups of adults (ages 20 and older) has the lowest labor-force participation rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

93. According to 2007 data on the U.S. population, which of the following groups of adults (ages 20 and older) has the highest unemployment rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

94. According to 2007 data on the U.S. population, which of the following groups of adults (ages 20 and older) has the lowest unemployment rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

95. According to 2007 data on the U.S. population, which of the following groups of teenagers (ages 16-19) has the highest labor-force participation rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

96. According to 2007 data on the U.S. population, which of the following groups of teenagers (ages 16-19) has the lowest labor-force participation rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

97. According to 2007 data on the U.S. population, which of the following groups of teenagers (ages 16-19) has the highest unemployment rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

98. According to 2007 data on the U.S. population, which of the following groups of teenagers (ages 16-19) has the lowest unemployment rate?
|a. |white males |
|b. |white females |
|c. |black males |
|d. |black females |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

Table 28-3

2003 Labor Data for Adults (age 16 and older) in Meditor

|Males not in labor force |45 million |
|Females not in labor force |35 million |
|Males unemployed |5 million |
|Females unemployed |5 million |
|Males employed |85 million |
|Females employed |65 million |

99. Refer to Table 28-3. What is the adult population in Meditor?
|a. |90 million |
|b. |160 million |
|c. |230 million |
|d. |240 million |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Applicative

100. Refer to Table 28-3. What is the adult labor force in Meditor?
|a. |90 million |
|b. |150 million |
|c. |160 million |
|d. |230 million |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

101. Refer to Table 28-3. What is the adult unemployment rate in Meditor?
|a. |4.2 percent |
|b. |6.25 percent |
|c. |6.7 percent |
|d. |10 percent |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

102. Refer to Table 28-3. What is the adult labor-force participation rate in Meditor?
|a. |37.5 percent |
|b. |62.5 percent |
|c. |66.7 percent |
|d. |95.8 percent |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

103. Refer to Table 28-3. What is the adult male population in Meditor?
|a. |50 million |
|b. |90 million |
|c. |130 million |
|d. |135 million |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Applicative

104. Refer to Table 28-3. What is the adult male labor force in Meditor?
|a. |50 million |
|b. |85 million |
|c. |90 million |
|d. |130 million |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

105. Refer to Table 28-3. What is the adult male unemployment rate in Meditor?
|a. |3.7 percent |
|b. |5 percent |
|c. |5.6 percent |
|d. |5.9 percent |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

106. Refer to Table 28-3. What is the adult male labor-force participation rate in Meditor?
|a. |37 percent |
|b. |63 percent |
|c. |66.7 percent |
|d. |96.3 percent |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

107. Refer to Table 28-3. What is the adult female population in Meditor?
|a. |40 million |
|b. |70 million |
|c. |100 million |
|d. |105 million |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Adult population MSC: Applicative

108. Refer to Table 28-3. What is the adult female labor force in Meditor?
|a. |40 million |
|b. |65 million |
|c. |70 million |
|d. |100 million |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Applicative

109. Refer to Table 28-3. What is the adult female unemployment rate in Meditor?
|a. |4.8 percent |
|b. |5 percent |
|c. |7.1 percent |
|d. |7.7 percent |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Applicative

110. Refer to Table 28-3. What is the adult female labor-force participation rate in Meditor?
|a. |38.1 percent |
|b. |61.9 percent |
|c. |66.7 percent |
|d. |95.2 percent |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Applicative

111. Data on the unemployment rate in the U.S. since 1960 show that the economy
|a. |always has some unemployment and that the amount stays constant from year to year. |
|b. |always has some unemployment and that the amount changes from year to year. |
|c. |sometimes has some unemployment and that the amount stays constant from year to year. |
|d. |sometimes has some unemployment and that the amount changes from year to year. |

ANS: B DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

112. Data on the unemployment rate in the U.S. since 1960 show that the unemployment rate is
|a. |always zero. |
|b. |sometimes zero. |
|c. |rarely zero. |
|d. |never zero. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

113. The normal rate of unemployment around which the unemployment rate fluctuates is called
|a. |the normal rate of unemployment. |
|b. |the natural rate of unemployment. |
|c. |cyclical unemployment. |
|d. |fluctuating unemployment. |

ANS: B DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

114. The deviation of unemployment from its natural rate is called
|a. |the normal rate of unemployment. |
|b. |deviant unemployment. |
|c. |cyclical unemployment. |
|d. |fluctuating unemployment. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

115. Economists at the Congressional Budget Office estimated that for 2007, the U.S. natural rate of unemployment was
|a. |2.6 percent. |
|b. |3.1 percent. |
|c. |4.8 percent. |
|d. |6 percent. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Definitional

116. Since 1960, the natural rate of unemployment in the U.S. has been between
|a. |0.4 and 0.6 percent. |
|b. |4 and 6 percent. |
|c. |14 and 16 percent. |
|d. |40 and 60 percent. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

117. Which list contains two periods when the U.S. unemployment rate was below the natural rate of unemployment?
|a. |1965-1968, 1981-1984 |
|b. |1965-1968, 1997-2000 |
|c. |1981-1984, 1991-1994 |
|d. |1991-1994, 1997-2000 |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Interpretive

118. Which of the following is not a cause of the changing role of women in American society over the past several decades?
|a. |new technologies that have reduced the amount of time required to complete routine household tasks |
|b. |improved birth control |
|c. |changing political and social attitudes |
|d. |scientists have shown that women are better employees than men |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Role of women MSC: Interpretive

119. Just after World War II, the labor-force participation rate of women was
|a. |about 25 percent, and in 2007, it was about 50 percent. |
|b. |about 33 percent, and in 2007, it was about 60 percent. |
|c. |about 50 percent, and in 2007, it was about 70 percent. |
|d. |about 60 percent, and in 2007, it was about 80 percent. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

120. Over the past several decades, the difference between the labor-force participation rates of men and women in the U.S. has
|a. |gradually increased. |
|b. |remained constant. |
|c. |gradually decreased. |
|d. |been eliminated. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Definitional

121. Over the past several decades in the United States, the labor-force participation rate of women has
|a. |increased and the labor-force participation rate of men has increased. |
|b. |increased and the labor-force participation rate of men has decreased. |
|c. |decreased and the labor-force participation rate of men has increased. |
|d. |decreased and the labor-force participation rate of men has decreased. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

122. Which of the following is not a cause of the decline in the U.S. men’s labor-force participation rate over the past several decades?
|a. |young men now stay in school longer than their fathers and grandfathers did |
|b. |older men now retire earlier and live longer |
|c. |with more women employed, there are fewer jobs now available to men |
|d. |more fathers now stay at home to raise their children |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

123. Just after World War II, the labor-force participation rate of men was
|a. |about 33 percent, and in 2007, it was about 50 percent. |
|b. |about 50 percent, and in 2007, it was about 60 percent. |
|c. |about 65 percent, and in 2007, it was about 60 percent. |
|d. |about 87 percent, and in 2007, it was about 73 percent. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor-force participation rate MSC: Interpretive

124. Recent entrants into the labor force account for about
|a. |1/5 of those who are unemployed. |
|b. |1/4 of those who are unemployed. |
|c. |1/3 of those who are unemployed. |
|d. |1/2 of those who are unemployed. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

125. Spells of unemployment end about
|a. |1/5 of the time with the person leaving the labor force. |
|b. |1/4 of the time with the person leaving the labor force. |
|c. |1/3 of the time with the person leaving the labor force. |
|d. |1/2 of the time with the person leaving the labor force. |

ANS: D DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

126. A person who is not employed and claims to be trying hard to find a job but really is not trying hard to find a job
|a. |is counted as out of the labor force but should be counted as unemployed. |
|b. |is counted as unemployed but should be counted as out of the labor force. |
|c. |is correctly counted as out of the labor force. |
|d. |is correctly counted as unemployed. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment | Labor force
MSC: Interpretive

127. Suppose that some people are counted as unemployed when, to maintain unemployment compensation, they search for work only at places where they are unlikely to be hired. If these individuals were counted as out of the labor force instead of as unemployed, then
|a. |both the unemployment rate and labor-force participation rate would be higher. |
|b. |both the unemployment rate and labor-force participation rate would be lower. |
|c. |the unemployment rate would be lower and the labor-force participation rate would be higher. |
|d. |the unemployment rate would be higher and the participation rate would be lower. |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Analytical

128. Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed, then
|a. |both the unemployment rate and labor-force participation rate would be higher. |
|b. |both the unemployment rate and labor-force participation rate would be lower. |
|c. |the unemployment rate would be higher and the labor-force participation rate would be higher. |
|d. |the unemployment rate would be lower and the labor-force participation rate would be unaffected. |

ANS: D DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Analytical

129. Some people who are employed or who are not making serious effort to find employment will report themselves as unemployed. Some people who want to find work will be counted as out of the labor force.
|a. |Both the first and the second fact tend to make the reported unemployment rate lower than the actual unemployment rate. |
|b. |Both the first and the second fact tend to make the reported unemployment rate higher than the actual unemployment rate.|
|c. |The first fact tends to make the reported unemployment rate higher than the actual unemployment rate, while the second |
| |fact tends to make the reported unemployment rate lower than the actual unemployment rate. |
|d. |The first fact tends to make the reported unemployment rate lower than the actual unemployment rate, while the second |
| |fact tends to make the reported unemployment rate higher than the actual unemployment rate. |

ANS: C DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Analytical

130. Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, then
|a. |both the unemployment rate and labor-force participation rate would be higher. |
|b. |the unemployment rate would be higher and the labor-force participation rate would be lower. |
|c. |the unemployment rate would be lower and the labor-force participation rate would be higher. |
|d. |both the unemployment rate and labor-force participation rate would be lower. |

ANS: A DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment rate | Labor-force participation rate MSC: Analytical

131. Discouraged workers
|a. |are counted as out of the labor force but should be counted as unemployed. |
|b. |are counted as unemployed but should be counted as out of the labor force. |
|c. |are correctly counted as out of the labor force. |
|d. |are correctly counted as unemployed. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Discouraged workers
MSC: Interpretive

132. Some individuals would like to have a job, but they have given up looking for a job after an unsuccessful search. These individuals are called
|a. |unattached workers, and they are classified by the Bureau of Labor Statistics as unemployed. |
|b. |unattached workers, and they are not classified by the Bureau of Labor Statistics as unemployed. |
|c. |discouraged workers, and they are classified by the Bureau of Labor Statistics as unemployed. |
|d. |discouraged workers, and they are not classified by the Bureau of Labor Statistics as unemployed. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Bureau of Labor Statistics | Discouraged workers MSC: Interpretive

133. Who would be included in the labor force?
|a. |Homer, who is waiting for his new job to start |
|b. |Michelle, who has become discouraged looking for a job and has quit looking |
|c. |Derrick, an unpaid homemaker |
|d. |None of the above would be included in the labor force. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Labor force MSC: Interpretive

134. The reported unemployment rate should be viewed as
|a. |a useful but imperfect measure of joblessness. |
|b. |clearly smaller than the true unemployment rate. |
|c. |clearly larger than the true unemployment rate. |
|d. |being very close to the true unemployment rate. |

ANS: A DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate
MSC: Definitional

135. Marginally attached workers are people who
|a. |are looking for a better job than they currently have. |
|b. |are not working and are not looking for work, but would work if asked. |
|c. |are working part-time while they go to school or get training for a better job. |
|d. |are only a few years from retirement. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Marginally attached workers MSC: Interpretive

136. Consider two people who are currently out of work. Tim is not looking for work because there have been many job cuts where he lives and he doesn't think it likely that he will find work. Bev is not currently looking for work, but she would like a job and she has looked for work in the past. The Bureau of Labor Statistics considers
|a. |both Tim and Bev to be marginally attached workers. |
|b. |neither Tim nor Bev to be marginally attached workers. |
|c. |only Tim to be a marginally attached worker. |
|d. |only Bev to be a marginally attached worker. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Marginally attached workers MSC: Interpretive

Table 28-4

|Civilian labor force |100 million |
|Persons unemployed 15 weeks or longer |1.6 million |
|Job losers and persons who have completed temporary jobs (excludes job leavers) |3.1 million |
|Total unemployed |6.2 million |
|Total unemployed plus discouraged workers |7.0 million |
|Total unemployed plus all marginally attached workers |8.1 million |
|Total unemployed plus all marginally attached workers plus total employed part-time for economic reasons | |
| |9.2 million |

137. Refer to Table 28-4. What is the U-1 measure of labor underutilization?
|a. |1.6 percent |
|b. |3.1 percent |
|c. |6.2 percent |
|d. |7.0 percent |

ANS: A DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: U-1
MSC: Analytical

138. Refer to Table 28-4. What is the U-2 measure of labor underutilization?
|a. |1.5 percent |
|b. |3.1 percent |
|c. |4.7 percent |
|d. |6.2 percent |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: U-2
MSC: Analytical

139. Refer to Table 28-4. What is the U-3 measure of labor underutilization?
|a. |4.7 percent |
|b. |6.2 percent |
|c. |7.0 percent |
|d. |10.9 percent |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: U-3
MSC: Analytical

140. Refer to Table 28-4. What is the U-4 measure of labor underutilization?
|a. |6.5 percent |
|b. |6.9 percent |
|c. |7.0 percent |
|d. |17.9 percent |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: U-4
MSC: Analytical

141. Refer to Table 28-4. What is the U-5 measure of labor underutilization?
|a. |7.5 percent |
|b. |7.9 percent |
|c. |8.1 percent |
|d. |26 percent |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: U-5
MSC: Analytical

142. Refer to Table 28-4. What is the U-6 measure of labor underutilization?
|a. |8.4 percent |
|b. |9.0 percent |
|c. |9.2 percent |
|d. |35.2 percent |

ANS: B DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: U-6
MSC: Analytical

143. Most spells of unemployment are
|a. |long, and most unemployment observed at any given time is long term. |
|b. |long, but most unemployment observed at any given time is short term. |
|c. |short, but most unemployment observed at any given time is long term. |
|d. |short, and most unemployment observed at any given time is short term. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Definitional

144. If you were told that someone you knew nothing else about had just become unemployed, your best guess would be
|a. |that they would be unemployed for a long time, and that most of the unemployed they’ve joined have been unemployed for a|
| |long time. |
|b. |that they would be unemployed for a long time, even though most of the unemployed they’ve joined have been unemployed |
| |for a short time. |
|c. |that they would be unemployed for a short time, even though most of the unemployed they’ve joined have been unemployed |
| |for a long time. |
|d. |that they will be unemployed for a short time, and that most of the unemployed they’ve joined have been unemployed for a|
| |short time. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

145. In one year, you meet 52 people who are each unemployed for one week and eight people who are each unemployed for the whole year. What percentage of the unemployment spells you encountered was short-term, and what percentage of the unemployment you encountered in a given week was long-term?
|a. |52 percent and 13.3 percent |
|b. |52 percent and 88.9 percent |
|c. |86.7 percent and 13.3 percent |
|d. |86.7 percent and 88.9 percent |

ANS: D DIF: 3 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Analytical

146. Evidence provided by economists indicates that the typical person who becomes unemployed
|a. |will soon find a job. |
|b. |will find a job, but not before a year or more has gone by. |
|c. |will leave the labor force and never return. |
|d. |does so due to retirement. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

147. Which of the following is not correct?
|a. |Most people who become unemployed will soon find jobs. |
|b. |In an ideal labor market, wages would adjust to ensure that all workers are always fully employed. |
|c. |The unemployment rate occasionally falls to zero. |
|d. |There are always some workers without jobs, even when the overall economy is doing well. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

148. Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called
|a. |the natural rate of unemployment. |
|b. |cyclical unemployment. |
|c. |structural unemployment. |
|d. |frictional unemployment. |

ANS: D DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Definitional

149. Unemployment that results because the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one is called
|a. |the natural rate of unemployment. |
|b. |cyclical unemployment. |
|c. |structural unemployment. |
|d. |frictional unemployment. |

ANS: C DIF: 1 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Definitional

150. People who are unemployed because of job search are best classified as
|a. |cyclically unemployed. |
|b. |structurally unemployed. |
|c. |frictionally unemployed. |
|d. |discouraged workers. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

151. People who are unemployed because wages are, for some reason, set above the level that brings labor supply and demand into equilibrium are best classified as
|a. |cyclically unemployed. |
|b. |structurally unemployed. |
|c. |frictionally unemployed. |
|d. |discouraged workers. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

152. If the natural rate of unemployment is 5.2 percent and the actual rate of unemployment is 5.7 percent, then by definition there is
|a. |cyclical unemployment amounting to 0.5 percent of the labor force. |
|b. |frictional unemployment amounting to 0.5 percent of the labor force. |
|c. |structural unemployment amounting to 0.5 percent of the labor force. |
|d. |search unemployment amounting to 0.5 percent of the labor force. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Cyclical unemployment
MSC: Interpretive

153. Unemployment that exists because it takes time for workers to search for the jobs that suit them best is
|a. |frictional unemployment, which contributes to the natural rate of unemployment. |
|b. |frictional unemployment, which does not contribute to the natural rate of unemployment. |
|c. |structural unemployment, which contributes to the natural rate of unemployment. |
|d. |structural unemployment, which does not contribute to the natural rate of unemployment. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Natural rate of unemployment MSC: Interpretive

154. Unemployment that exists because there is a shortage of jobs is
|a. |frictional unemployment, which contributes to the natural rate of unemployment. |
|b. |frictional unemployment, which does not contribute to the natural rate of unemployment. |
|c. |structural unemployment, which contributes to the natural rate of unemployment. |
|d. |structural unemployment, which does not contribute to the natural rate of unemployment. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Structural unemployment | Natural rate of unemployment MSC: Interpretive

155. Which of the following is not an explanation for the existence of unemployment in the long run?
|a. |it takes time for workers to search for the jobs that are best suited for them |
|b. |minimum-wage laws |
|c. |unions |
|d. |the business cycle |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

156. Which of the following is an explanation for the existence of frictional unemployment?
|a. |efficiency wages |
|b. |minimum-wage laws |
|c. |unions |
|d. |job search |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

157. Which of the following is not an explanation for the existence of structural unemployment?
|a. |efficiency wages |
|b. |job search |
|c. |minimum-wage laws |
|d. |unions |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

158. Frictional unemployment is thought to explain
|a. |relatively short spells of unemployment, as is structural unemployment. |
|b. |relatively long spells of unemployment, as is structural unemployment. |
|c. |relatively short spells of unemployment, while structural unemployment is thought to explain relatively long spells of |
| |unemployment. |
|d. |relatively long spells of unemployment, while structural unemployment is thought to explain relatively short spells of |
| |unemployment. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Structural unemployment MSC: Interpretive

159. The natural unemployment rate includes
|a. |both frictional and structural unemployment. |
|b. |neither frictional nor structural unemployment. |
|c. |structural, but not frictional unemployment. |
|d. |frictional, but not structural unemployment. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Natural rate of unemployment MSC: Interpretive

160. John is a stockbroker. He has had several job offers, but he has turned them down because he thinks he can find a firm that better matches his tastes and skills. Curtis has looked for work as an accountant for some time. While the demand for accountants doesn’t appear to be falling, there seems to be more people applying than jobs available.
|a. |John and Curtis are both frictionally unemployed. |
|b. |John and Curtis are both structurally unemployed. |
|c. |John is frictionally unemployed, and Curtis is structurally unemployed. |
|d. |John is structurally unemployed, and Curtis is frictionally unemployed. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Structural unemployment MSC: Interpretive

161. Meredith is looking for work as a computer programmer. Although her prospects are good, she hasn't yet taken a job. Julie is looking for work in a steel mill. Every time she shows up for an interview, there are more people looking for work than their are openings. Someone waiting in line with her tells her it has been that way for a long time.
|a. |Meredith and Julie are both frictionally unemployed. |
|b. |Meredith and Julie are both structurally unemployed. |
|c. |Meredith is frictionally unemployed, and Julie is structurally unemployed. |
|d. |Meredith is structurally unemployed, and Julie is frictionally unemployed. |

ANS: C DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Structural unemployment MSC: Interpretive

162. Jenna is searching for a job that suits her tastes about where to live and coworkers. Mary is looking for a job that makes best use of her skills.
|a. |Jenna and Mary are both frictionally unemployed. |
|b. |Jenna and Mary are both structurally unemployed. |
|c. |Jenna is frictionally unemployed, and Mary is structurally unemployed. |
|d. |Jenna is structurally unemployed, and Mary is frictionally unemployed. |

ANS: A DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Structural unemployment MSC: Interpretive

163. Bob is looking for work after school, but everywhere he fills out an application, the managers say they always have a lot more applications than open positions. Tom has a law degree. Several firms have made him offers, but he thinks he might be able to find a firm where his talents could be put to better use.
|a. |Bob and Tom are both frictionally unemployed. |
|b. |Bob and Tom are both structurally unemployed. |
|c. |Bob is frictionally unemployed, and Tom is structurally unemployed. |
|d. |Bob is structurally unemployed, and Tom is frictionally unemployed. |

ANS: D DIF: 2 REF: 28-1
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Structural unemployment MSC: Interpretive

164. Every month, the Bureau of Labor Statistics surveys 160,000 business establishments to help determine
|a. |the number of people unemployed. |
|b. |the number of jobs the economy has gained or lost. |
|c. |the size of the labor force. |
|d. |the number of people who own their own businesses. |

ANS: B DIF: 2 REF: 28-1
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Bureau of Labor Statistics | Jobs number MSC: Interpretive

Sec02 - Unemployment - Job Search

MULTIPLE CHOICE

1. Job search
|a. |is one reason economies always experience some unemployment. |
|b. |is the process of matching workers with appropriate jobs. |
|c. |would not be a problem if all workers and all jobs were the same. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Job search
MSC: Interpretive

2. If all workers and all jobs were the same such that all workers were equally well suited for all jobs, then there would be no
|a. |cyclical unemployment. |
|b. |frictional unemployment. |
|c. |natural rate of unemployment. |
|d. |structural unemployment. |

ANS: B DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

3. Sectoral shifts in demand for output
|a. |create structural unemployment. |
|b. |immediately reduce unemployment. |
|c. |increase unemployment due to job search. |
|d. |do not affect demand for labor. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Sectoral shifts | Frictional unemployment MSC: Interpretive

4. From time to time, the demand for workers has risen in one region of the United States and fallen in another. This illustrates
|a. |frictional unemployment created by efficiency wages. |
|b. |structural unemployment created by efficiency wages. |
|c. |frictional unemployment created by sectoral shifts. |
|d. |structural unemployment created by sectoral shifts. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Sectoral shifts MSC: Interpretive

5. Consumers decide to buy more computers and fewer typewriters. As a result, computer companies expand production while typewriter companies lay-off workers. This is an example of
|a. |frictional unemployment created by efficiency wages. |
|b. |frictional unemployment created by sectoral shifts. |
|c. |structural unemployment created by efficiency wages. |
|d. |structural unemployment created by sectoral shifts. |

ANS: B DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Sectoral shifts MSC: Interpretive

6. Suppose that because of the popularity of the low-carb diet, bakeries need fewer workers and steak houses need more workers. This is an example of
|a. |frictional unemployment created by efficiency wages. |
|b. |frictional unemployment created by sectoral shifts. |
|c. |structural unemployment created by efficiency wages. |
|d. |structural unemployment created by sectoral shifts. |

ANS: B DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Sectoral shifts MSC: Interpretive

7. In 2002, the demand for construction workers increased and the demands for textile and steel workers diminished. This is an example of
|a. |frictional unemployment created by efficiency wages. |
|b. |structural unemployment created by efficiency wages. |
|c. |frictional unemployment created by sectoral shifts. |
|d. |structural unemployment created by sectoral shifts. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Sectoral shifts MSC: Interpretive

8. The Bureau of Labor Statistics predicts that the number of jobs for veterinary technicians will grow faster than most occupations while the number of jobs for telephone operators will decline. This change in the labor market could lead to
|a. |frictional unemployment created by efficiency wages. |
|b. |structural unemployment created by efficiency wages. |
|c. |frictional unemployment created by sectoral shifts. |
|d. |structural unemployment created by sectoral shifts. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Sectoral shifts MSC: Interpretive

9. Frictional unemployment is inevitable because
|a. |sectoral shifts are always happening. |
|b. |there is a federal minimum-wage law in the U.S. |
|c. |some people do not want to be employed. |
|d. |unions are very popular in the U.S. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Frictional unemployment | Sectoral shifts MSC: Interpretive

10. Which of the following was not among the four industries with the largest employment in the United States a century ago?
|a. |cotton goods |
|b. |men’s clothing |
|c. |corn |
|d. |lumber |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Interpretive

11. Which of the following is not among the four industries with the largest employment in the United States today?
|a. |lumber |
|b. |aircraft |
|c. |communications |
|d. |electrical components |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: The study of economics and definitions of economics
TOP: Employment MSC: Interpretive

12. Which of the following is not correct?
|a. |Frictional unemployment is inevitable in a dynamic economy. |
|b. |Although the unemployment created by sectoral shifts is unfortunate, in the long run such changes lead to higher |
| |productivity and higher living standards. |
|c. |At least 10 percent of U.S. manufacturing jobs are destroyed every year. |
|d. |More than 13 percent of U.S. workers leave their jobs in a typical month. |

ANS: D DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

13. Frictional unemployment can be the consequence of
|a. |workers leaving existing jobs to find ones they like better. |
|b. |one industry declining while another is growing. |
|c. |changes in the working conditions offered by competing firms. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

14. Which of the following is not a cause of frictional unemployment?
|a. |the destruction of manufacturing jobs |
|b. |a worker leaving a job to find one with better benefits |
|c. |minimum-wage laws |
|d. |unemployment insurance |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

15. Public policy
|a. |can reduce both frictional unemployment and the natural rate of unemployment. |
|b. |can reduce frictional unemployment, but it cannot reduce the natural rate of unemployment. |
|c. |cannot reduce frictional unemployment, but it can reduce the natural rate of unemployment. |
|d. |cannot reduce either frictional unemployment or the natural rate of unemployment. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment | Natural rate of unemployment
MSC: Interpretive

16. Policies that reduce the time it takes unemployed workers to find new jobs
|a. |can reduce both frictional unemployment and the natural rate of unemployment. |
|b. |can reduce frictional unemployment, but it cannot reduce the natural rate of unemployment. |
|c. |cannot reduce frictional unemployment, but it can reduce the natural rate of unemployment. |
|d. |cannot reduce either frictional unemployment or the natural rate of unemployment. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment | Natural rate of unemployment
MSC: Interpretive

17. Which of the following does not help reduce frictional unemployment?
|a. |government-run employment agencies |
|b. |public training programs |
|c. |unemployment insurance |
|d. |All of the above help reduce frictional unemployment. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment MSC: Interpretive

18. Providing training for unemployed individuals is primarily intended to reduce
|a. |frictional unemployment. |
|b. |seasonal unemployment. |
|c. |structural unemployment. |
|d. |cyclical unemployment. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Public policy | Frictional unemployment MSC: Interpretive

19. Government-run employment agencies and public training programs are operated by the government to try to facilitate job search and reduce unemployment.
|a. |Almost all economists agree that such programs are of no use. |
|b. |Almost all economists agree that such programs work very well. |
|c. |Some economists claim that the government can do these things no better than firms and individuals could do them for |
| |themselves. |
|d. |Some economists claim that these programs increase frictional unemployment. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Public policy | Unemployment MSC: Interpretive

20. Of the following groups, who is eligible for unemployment insurance benefits?
|a. |the unemployed who quit their jobs |
|b. |the unemployed who were laid off because their previous employers no longer needed their skills |
|c. |the unemployed who were fired for cause |
|d. |the unemployed who just entered the labor force |

ANS: B DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Interpretive

21. A typical American worker covered by unemployment insurance receives
|a. |50 percent of his former wages for 26 weeks. |
|b. |50 percent of his former wages for 52 weeks. |
|c. |100 percent of his former wages for 26 weeks. |
|d. |100 percent of his former wages for 52 weeks. |

ANS: A DIF: 1 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Definitional

22. Unemployment insurance
|a. |reduces search effort and raises unemployment. |
|b. |reduces search effort and lowers unemployment. |
|c. |increases search effort and raises unemployment. |
|d. |increases search effort and decreases unemployment. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Interpretive

23. Evidence from research studies by economists
|a. |shows that increased unemployment benefits decrease the job search efforts of the unemployed. |
|b. |shows that increased unemployment benefits have virtually no effect on the job search efforts of the unemployed. |
|c. |shows that increased unemployment benefits increase the job search efforts of the unemployed. |
|d. |is conflicting on what increased unemployment benefits do to the job search efforts of the unemployed. |

ANS: A DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Unemployment insurance MSC: Interpretive

24. More generous unemployment insurance would
|a. |raise structural unemployment. |
|b. |raise frictional unemployment. |
|c. |lower structural unemployment. |
|d. |lower frictional unemployment. |

ANS: B DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment insurance | Frictional unemployment MSC: Interpretive

25. Economists would predict that, other things the same, the more generous unemployment compensation a country has,
|a. |the shorter the duration of each spell of unemployment, and the higher the unemployment rate. |
|b. |the shorter the duration of each spell of unemployment, and the lower the unemployment rate. |
|c. |the longer the duration of each spell of unemployment, and the higher the unemployment rate. |
|d. |the longer the duration of each spell of unemployment, and the lower the unemployment rate. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Unemployment insurance MSC: Interpretive

26. Unemployment insurance
|a. |reduces the hardship of unemployment, but it also increases the amount of unemployment. |
|b. |reduces the incentive for the unemployed to find and take new jobs. |
|c. |causes workers to be less likely to seek guarantees of job security when they negotiate with employers over the terms of|
| |employment. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment insurance | Incentives MSC: Interpretive

27. Unemployment insurance
|a. |may improve the ability of the economy to match workers with appropriate jobs. |
|b. |reduces the job search efforts of the unemployed. |
|c. |increases the amount of frictional unemployment in the economy. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Interpretive

28. Which of the following is correct?
|a. |Unemployment insurance raises structural unemployment because it reduces the job search efforts of the unemployed. |
|b. |Most economists are skeptical of the value of unemployment insurance primarily because they believe that it results in a|
| |poorer match between workers and jobs. |
|c. |Studies show that when the unemployed become ineligible for benefits, the probability of their finding a job rises |
| |markedly. |
|d. |All of the above are correct. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment insurance
MSC: Interpretive

29. Frictional unemployment is
|a. |not inevitable; rather, it can be reduced to zero by well-designed public policies. |
|b. |not inevitable; rather, it could be reduced to zero if by the elimination of unemployment insurance. |
|c. |inevitable, because at any given time, jobs are being created in some firms and destroyed in other firms. |
|d. |inevitable, because in some industries, wages are always set above the level that brings supply and demand into |
| |equilibrium. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

30. Which of the following is not correct?
|a. |The unemployment rate is an imperfect measure of a nation’s overall level of economic well-being. |
|b. |Most job search in the U.S. economy takes place without intervention by the government. |
|c. |Most economists agree that eliminating unemployment insurance would increase the nation’s overall level of well-being. |
|d. |Other things the same, countries that offer more generous and longer-lasting unemployment insurance benefits are likely |
| |to have higher unemployment rates. |

ANS: C DIF: 2 REF: 28-2
NAT: Analytic LOC: Unemployment and inflation
TOP: Economists | Unemployment insurance | Economic well-being
MSC: Interpretive

Sec03 - Unemployment - Minimum-Wage Laws

MULTIPLE CHOICE

1. Which of the following is not correct?
|a. |Frictional unemployment results from the process of matching workers and jobs. |
|b. |Structural unemployment results when the number of jobs is insufficient for the number of workers. |
|c. |Minimum wages are the predominant reason for unemployment in the U.S. economy. |
|d. |When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it raises the |
| |quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

2. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it
|a. |raises the quantity of labor supplied and raises the quantity of labor demanded compared to the equilibrium level. |
|b. |raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. |
|c. |reduces the quantity of labor supplied and raises the quantity of labor demanded compared to the equilibrium level. |
|d. |reduces the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. |

ANS: B DIF: 1 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Definitional

3. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, the result is a
|a. |shortage of labor and a shortage of jobs. |
|b. |shortage of labor and a surplus of jobs. |
|c. |surplus of labor and a shortage of jobs. |
|d. |surplus of labor and a surplus of jobs. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

4. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, there are
|a. |more workers willing to work than there are jobs, so some workers are unemployed. |
|b. |fewer workers willing to work than there are jobs, so some workers are unemployed. |
|c. |more workers willing to work than there are jobs, so unemployment decreases. |
|d. |fewer workers willing to work than there are jobs, so unemployment decreases. |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Minimum wage | Unemployment MSC: Interpretive

5. Minimum-wage laws can keep wages
|a. |above equilibrium and cause a surplus of labor. |
|b. |above equilibrium and cause a shortage of labor. |
|c. |below equilibrium and cause a surplus of labor. |
|d. |below equilibrium and cause a shortage of labor. |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

6. An increase in the minimum wage would
|a. |increase both the quantity demanded and the quantity supplied of labor. |
|b. |decrease both the quantity demanded and the quantity supplied of labor. |
|c. |increase the quantity of labor demanded but decrease the quantity of labor supplied. |
|d. |decrease the quantity of labor demanded but increase the quantity of labor supplied. |

ANS: D DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

7. If the minimum wage were currently above the equilibrium wage, than a decrease in the minimum wage would
|a. |increase both the quantity demanded and the quantity supplied of labor. |
|b. |decrease both the quantity demanded and the quantity supplied of labor. |
|c. |increase the quantity of labor demanded but decrease the quantity of labor supplied. |
|d. |decrease the quantity of labor demanded but increase the quantity of labor supplied. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

Figure 28-1

[pic]

8. Refer to Figure 28-1. At the equilibrium wage, how many workers are unemployed?
|a. |0 |
|b. |4000 |
|c. |5000 |
|d. |8000 |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Applicative

9. Refer to Figure 28-1. At the equilibrium wage, how many workers are employed?
|a. |0 |
|b. |1000 |
|c. |5000 |
|d. |9000 |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Employment
MSC: Applicative

10. Refer to Figure 28-1. If the government imposes a minimum wage of $4, then how many workers will be unemployed?
|a. |0 |
|b. |3000 |
|c. |4000 |
|d. |7000 |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Minimum wage MSC: Applicative

11. Refer to Figure 28-1. If the government imposes a minimum wage of $4, then how many workers will be employed?
|a. |3000 |
|b. |4000 |
|c. |5000 |
|d. |7000 |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Employment | Minimum wage MSC: Applicative

12. Refer to Figure 28-1. If the government imposes a minimum wage of $4, then unemployment will increase by
|a. |0 workers. |
|b. |2000 workers. |
|c. |4000 workers. |
|d. |5000 workers. |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Minimum wage MSC: Applicative

13. Refer to Figure 28-1. If the government imposes a minimum wage of $4, then employment will decrease by
|a. |0 workers. |
|b. |2000 workers. |
|c. |3000 workers. |
|d. |4000 workers. |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Employment | Minimum wage MSC: Applicative

14. Refer to Figure 28-1. If the government imposes a minimum wage of $8, then how many workers will be unemployed?
|a. |0 |
|b. |3000 |
|c. |4000 |
|d. |7000 |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Minimum wage MSC: Applicative

15. Refer to Figure 28-1. If the government imposes a minimum wage of $8, then how many workers will be employed?
|a. |3000 |
|b. |4000 |
|c. |5000 |
|d. |7000 |

ANS: A DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Employment | Minimum wage MSC: Applicative

16. Refer to Figure 28-1. If the government imposes a minimum wage of $8, then unemployment will increase by
|a. |0 workers. |
|b. |2000 workers. |
|c. |4000 workers. |
|d. |7000 workers. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Minimum wage MSC: Applicative

17. Refer to Figure 28-1. If the government imposes a minimum wage of $8, then employment will decrease by
|a. |0 workers. |
|b. |2000 workers. |
|c. |3000 workers. |
|d. |4000 workers. |

ANS: B DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Employment | Minimum wage MSC: Applicative

18. Refer to Figure 28-1. If unemployment is 2000 workers, then the minimum wage must be
|a. |$4. |
|b. |$5. |
|c. |$7. |
|d. |$8. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Unemployment | Minimum wage MSC: Applicative

19. Which of the following is not correct?
|a. |Minimum-wage laws are one reason there is always some unemployment in the U.S. economy. |
|b. |Minimum-wage laws affect all workers. |
|c. |Most U.S. workers have wages well above the legal minimum, so minimum-wage laws do not prevent the wage from adjusting |
| |to balance supply and demand. |
|d. |Minimum-wage laws matter most for the least skilled and least experienced members of the labor force, such as teenagers.|

ANS: B DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Minimum wage
MSC: Interpretive

20. Which of the following is not correct?
|a. |It is only among the least skilled and least experienced members of the labor force that minimum-wage laws cause |
| |unemployment. |
|b. |The equilibrium wages of the least skilled and least experienced members of the labor force tend to be low, and, |
| |therefore, are more likely to fall below the legal minimum wage. |
|c. |If the wage is kept below the equilibrium level for any reason, the result is unemployment. |
|d. |Minimum-wage laws, unions, and efficiency wages are all reasons wages may be kept above the equilibrium level. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets
TOP: Minimum wage | Unemployment MSC: Interpretive

21. If the wage is kept above the equilibrium wage for any reason, the result is
|a. |cyclical unemployment. |
|b. |frictional unemployment. |
|c. |seasonal unemployment. |
|d. |structural unemployment. |

ANS: D DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

22. Wages in excess of their equilibrium level help explain
|a. |frictional but not structural unemployment. |
|b. |structural but not frictional unemployment. |
|c. |both frictional and structural unemployment. |
|d. |neither frictional nor structural unemployment. |

ANS: B DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Structural unemployment | Frictional unemployment MSC: Interpretive

23. Wages in excess of their equilibrium level help explain
|a. |structural unemployment but not the natural rate of unemployment. |
|b. |the natural rate of unemployment but not structural unemployment. |
|c. |both structural unemployment and the natural rate of unemployment. |
|d. |neither structural unemployment nor the natural rate of unemployment. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Structural unemployment | Natural rate of unemployment MSC: Interpretive

24. Other things the same, an increase in wages above their equilibrium level
|a. |increases frictional unemployment but leaves the natural rate of unemployment unchanged. |
|b. |increases frictional unemployment and increases the natural rate of unemployment. |
|c. |increases structural unemployment but leaves the natural rate of unemployment unchanged. |
|d. |increases structural unemployment and increases the natural rate of unemployment. |

ANS: D DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation
TOP: Structural unemployment | Natural rate of unemployment MSC: Interpretive

25. Which of the following does not create unemployment by keeping wages above the equilibrium level?
|a. |efficiency wages |
|b. |job search |
|c. |minimum-wage laws |
|d. |unions |

ANS: B DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

26. When the wage is above the equilibrium level,
|a. |the labor market is functioning more efficiently than it otherwise would function. |
|b. |there is a shortage of labor. |
|c. |the quantity of labor supplied exceeds the quantity of labor demanded. |
|d. |job search is the primary explanation for the unemployment that is observed. |

ANS: C DIF: 2 REF: 28-3
NAT: Analytic LOC: Labor markets TOP: Wages
MSC: Interpretive

27. Workers searching for jobs that best suit them is most closely associated with
|a. |cyclical unemployment. |
|b. |frictional unemployment. |
|c. |seasonal unemployment. |
|d. |structural unemployment. |

ANS: B DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment
MSC: Interpretive

28. Workers waiting for jobs to open up is most closely associated with
|a. |cyclical unemployment. |
|b. |frictional unemployment. |
|c. |seasonal unemployment. |
|d. |structural unemployment. |

ANS: D DIF: 2 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

29. U.S. Department of Labor data show that minimum-wage workers tend to be
|a. |young and less educated. |
|b. |young and more educated. |
|c. |old and less educated. |
|d. |old and more educated. |

ANS: A DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Minimum wage
MSC: Definitional

30. U.S. Department of Labor data show that minimum-wage workers tend to be
|a. |more likely to be working part time and in the communication industry. |
|b. |more likely to be working part time and in the leisure and hospitality industry. |
|c. |more likely to be working full time and in the communication industry. |
|d. |more likely to be working full time and in the leisure and hospitality industry. |

ANS: B DIF: 1 REF: 28-3
NAT: Analytic LOC: Unemployment and inflation TOP: Minimum wage
MSC: Definitional

Sec04 - Unemployment - Unions and Collective Bargaining

MULTIPLE CHOICE

1. Which of the following is not correct?
|a. |A union is a worker association that bargains with employers over wages, benefits, and working conditions. |
|b. |Unions play a much larger role in the U.S. labor market now than they did in the past. |
|c. |Unions play a large role in many European countries. |
|d. |A union is a type of cartel. |

ANS: B DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

2. Between the 1940s and today, union membership in the U.S.
|a. |rose from about one-eighth to one-third of the labor force. |
|b. |rose from about one-third to one-half of the labor force. |
|c. |fell from about one-half to one-third of the labor force. |
|d. |fell from about one-third to one-eighth of the labor force. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

3. In Belgium, Norway, and Sweden, the percentage of workers who belong to unions is
|a. |almost zero. |
|b. |less than it is in the United States. |
|c. |about the same as it is in the United States. |
|d. |greater than it is in the United States. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

4. Which of the following is not correct?
|a. |When a union is present in a labor market, wages are not determined by the equilibrium of supply and demand. |
|b. |Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power. |
|c. |The process by which unions and firms agree on the terms of employment is called a strike. |
|d. |Most workers in the U.S. economy are not members of a union. |

ANS: C DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

5. Collective bargaining refers to
|a. |the process by which the government sets exemptions from the minimum wage law. |
|b. |setting the same wage for all employees to prevent conflict among workers. |
|c. |firms colluding to set the wages of employees in order to keep them below equilibrium. |
|d. |the process by which unions and firms agree on the terms of employment. |

ANS: D DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | Collective bargaining MSC: Definitional

6. Which of the following is not correct?
|a. |An organized withdrawal of labor from a firm by a union is called a strike. |
|b. |The power of a union comes from its ability to strike if the union and the firm do not agree on the terms of employment.|
|c. |Economists who study the effects of unions typically find that union workers earn about 25 to 35 percent more than |
| |similar workers who do not belong to unions. |
|d. |Workers in unions reap the benefit of collective bargaining, while workers not in unions bear some of the cost. |

ANS: C DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Strikes | Economists
MSC: Interpretive

7. Economists have found that union workers earn what percent more than similar nonunion workers?
|a. |0 to 5 |
|b. |5 to 10 |
|c. |10 to 20 |
|d. |20 to 30 |

ANS: C DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Economists | Unions | Wages
MSC: Definitional

8. When a union raises the wage above the equilibrium level, it
|a. |reduces both the quantity of labor supplied and the quantity of labor demanded, resulting in unemployment. |
|b. |reduces the quantity of labor supplied and raises the quantity of labor demanded, resulting in unemployment. |
|c. |raises the quantity of labor supplied and reduces the quantity of labor demanded, resulting in unemployment. |
|d. |raises both the quantity of labor supplied and the quantity of labor demanded, resulting in unemployment. |

ANS: C DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Unemployment
MSC: Definitional

9. When a union bargains successfully with employers, in that industry,
|a. |both the quantity of labor supplied and the quantity of labor demanded increase. |
|b. |both the quantity of labor supplied and the quantity of labor demanded decrease. |
|c. |the quantity of labor supplied increases and the quantity of labor demanded decreases. |
|d. |the quantity of labor demanded increases and the quantity of labor supplied decreases. |

ANS: C DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

10. When a union bargains successfully with employers, in that industry,
|a. |unemployment and wages increase. |
|b. |unemployment and wages decrease. |
|c. |unemployment decreases and wages increase. |
|d. |unemployment increases and wages decrease. |

ANS: A DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | Unemployment | Wages MSC: Interpretive

11. The introduction of a union into an industry
|a. |raises wages and employment in that industry. |
|b. |lowers wages and employment in that industry. |
|c. |lowers wages and raises employment in that industry. |
|d. |raises wages and lowers employment in that industry. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | Wages | Employment MSC: Interpretive

12. Unions do not cause which of the following?
|a. |frictional unemployment |
|b. |the wage to rise above the equilibrium level |
|c. |conflict between insiders who benefit from high union wages and outsiders who do not get the union jobs |
|d. |reduced wages in nonunionized industries |

ANS: A DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: Unions | Structural unemployment MSC: Interpretive

13. Unions contribute to
|a. |cyclical unemployment. |
|b. |frictional unemployment. |
|c. |seasonal unemployment. |
|d. |structural unemployment. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Unemployment and inflation
TOP: Unions | Structural unemployment MSC: Interpretive

14. Unions contribute to
|a. |frictional but not structural unemployment. |
|b. |structural but not frictional unemployment. |
|c. |both frictional and structural unemployment. |
|d. |neither frictional nor structural unemployment. |

ANS: B DIF: 2 REF: 28-4
NAT: Analytic LOC: Unemployment and inflation
TOP: Unions | Structural unemployment | Frictional unemployment
MSC: Interpretive

15. Unions contribute to
|a. |structural unemployment but not the natural rate of unemployment. |
|b. |the natural rate of unemployment but not structural unemployment. |
|c. |both structural unemployment and the natural rate of unemployment. |
|d. |neither structural unemployment nor the natural rate of unemployment. |

ANS: C DIF: 2 REF: 28-4
NAT: Analytic LOC: Unemployment and inflation
TOP: Unions | Structural unemployment | Natural rate of unemployment
MSC: Interpretive

16. Unions
|a. |do not affect the natural rate of unemployment. |
|b. |lower the wages of unionized workers. |
|c. |raise the profits of unionized firms. |
|d. |lower the wages of nonunionized workers. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

17. When unions raise wages in some sectors of the economy, the supply of labor in other sectors of the economy
|a. |decreases, raising wages in industries that are not unionized. |
|b. |decreases, reducing wages in industries that are not unionized. |
|c. |increases, raising wages in industries that are not unionized. |
|d. |increases, reducing wages in industries that are not unionized. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

18. Suppose that telemarketers are not unionized. If they unionize, then the supply of labor in other sectors of the economy will
|a. |decrease, raising wages in industries that are not unionized. |
|b. |decrease, reducing wages in industries that are not unionized. |
|c. |increase, raising wages in industries that are not unionized. |
|d. |increase, reducing wages in industries that are not unionized. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

19. Suppose that neither textile workers nor shoemakers are unionized. If textile workers unionize, then the supply of shoemakers will
|a. |rise and their wages will rise. |
|b. |rise and their wages will fall. |
|c. |fall and their wages will fall. |
|d. |fall and their wages will rise. |

ANS: B DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

20. Suppose that butchers and bakers have no unions. Now suppose the butchers form a union. What does this do the labor supply of and wages of bakers?
|a. |It increases the labor supply and wages of bakers. |
|b. |It increases the labor supply and decreases the wages of bakers. |
|c. |It decreases the labor supply and increases the wages of bakers. |
|d. |It decreases the labor supply and wages of bakers. |

ANS: B DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

21. Consider two labor markets in which jobs are equally attractive in all respects other than the wage rate. All workers are equally able to do either job. Initially, both labor markets are perfectly competitive. If a union organizes workers in one of the markets, then the wage rates will tend to
|a. |rise in both markets. |
|b. |fall in both markets |
|c. |rise for the union jobs, but remain unchanged for the nonunion jobs. |
|d. |rise for the union jobs and fall for the nonunion jobs. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

22. Suppose that grocery clerks and nurses are not unionized. If the nurses unionize, then
|a. |the wages of both grocery clerks and nurses will rise. |
|b. |the wages of both grocery clerks and nurses will fall. |
|c. |the wages of grocery clerks will rise and the wages of nurses will fall. |
|d. |the wages of nurses will rise and the wages of grocery clerks will fall. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Wages
MSC: Interpretive

23. Which of the following is not correct?
|a. |Unions are exempt from U.S. antitrust laws. |
|b. |The Wagner Act of 1935 prevents U.S. employers from interfering when workers try to organize unions. |
|c. |The National Labor Relations Board is the U.S. government agency that enforces workers’ right to unionize. |
|d. |Right-to-work laws prevent firms from hiring permanent replacements for workers who are on strike. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions | Right-to-work laws
MSC: Interpretive

24. The Wagner Act of 1935
|a. |prevents unions from acting as cartels. |
|b. |allows workers joining a unionized firm to choose not to join the union. |
|c. |prevents employers from interfering when workers try to organize a union. |
|d. |prevents firms from hiring permanent replacements for workers who are on strike. |

ANS: C DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Wagner Act
MSC: Definitional

25. The National Labor Relations Board
|a. |enforces antitrust laws against unions. |
|b. |enforces workers' rights to unionize. |
|c. |acts as a union's representative in collective bargaining. |
|d. |is required to approve all collective bargaining agreements before they can be enforced. |

ANS: B DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets
TOP: National Labor Relations Board MSC: Definitional

26. Right-to-work laws
|a. |guarantee workers the right to form unions. |
|b. |give workers in a unionized firm the right to choose whether to join the union. |
|c. |prevent employers from hiring permanent replacements for workers who are on strike. |
|d. |prevent workers from being fired because of increases in wages brought about by collective bargaining. |

ANS: B DIF: 1 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Right-to-work laws
MSC: Definitional

27. In the absence of right-to-work laws, workers
|a. |that went on strike could be permanently replaced. |
|b. |might be required to join the union if they worked for a unionized firm. |
|c. |would not be able to unionize. |
|d. |would not be able to strike. |

ANS: B DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Right-to-work laws
MSC: Interpretive

28. Which of the following is correct?
|a. |There is consensus among economists that unions are good for the economy. |
|b. |There is consensus among economists that unions are bad for the economy. |
|c. |There is consensus among economists that, on net, unions have almost no impact on macroeconomic variables. |
|d. |There is no consensus among economists about whether unions are good or bad for the economy. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Economists | Unions
MSC: Interpretive

29. There is a clear consensus among economists that unions are
|a. |good for the economy because they result in higher wages for most workers. |
|b. |good for the economy because they are a necessary antidote to the market power of employers. |
|c. |bad for the economy because they are cartels and therefore detrimental to an efficient allocation of resources. |
|d. |None of the above is correct; there is no clear consensus among economists about whether unions are good or bad for the |
| |economy. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Unemployment and inflation TOP: Economists | Unions
MSC: Interpretive

30. Which of the following is not correct?
|a. |Unions raise the wages above the level that would prevail in competitive markets. |
|b. |Unions reduce the quantity of labor demanded, cause some workers to be unemployed, and reduce the wages in the rest of |
| |the economy. |
|c. |Critics argue that the allocation of labor resulting from unions is both inefficient and inequitable. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

31. Which of the following is not a contention of advocates of unions?
|a. |Unions are a necessary antidote to the market power of the firms that hire workers. |
|b. |In the case of a “company town,” a union may balance the firm’s market power and protect the workers from being at the |
| |mercy of the firm’s owners. |
|c. |The introduction of a union benefits all workers in a firm. |
|d. |Unions are important for helping firms respond efficiently to workers’ concerns. |

ANS: C DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

32. Which of the following is correct?
|a. |Nearly all economists believe that unions are bad for the economy as a whole. |
|b. |Unions raise wages above the competitive equilibrium level. |
|c. |Unions increase the level of employment in unionized firms. |
|d. |Unions decrease the level of employment in nonunionized firms. |

ANS: B DIF: 2 REF: 28-4
NAT: Analytic LOC: Labor markets TOP: Unions
MSC: Interpretive

Sec05 - Unemployment - The Theory of Efficiency Wages

MULTIPLE CHOICE

1. Which of the following is not a reason economies always experience some unemployment?
|a. |job search |
|b. |unions |
|c. |scarcity of resources |
|d. |efficiency wages |

ANS: C DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment
MSC: Interpretive

2. Which of the following is not a reason economies experience structural unemployment?
|a. |job search |
|b. |unions |
|c. |minimum-wage laws |
|d. |efficiency wages |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

3. Which of the following causes of unemployment is associated with a wage rate above the market equilibrium level?
|a. |minimum-wage laws |
|b. |unions |
|c. |efficiency wages |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

4. Which of the following causes of unemployment is not associated with a wage rate above the market equilibrium level?
|a. |efficiency wages |
|b. |job search |
|c. |minimum-wage laws |
|d. |unions |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

5. If minimum-wage laws, unions, efficiency wages, and all other factors that could prevent wages from reaching equilibrium were eliminated, then there would be no
|a. |cyclical unemployment. |
|b. |frictional unemployment. |
|c. |structural unemployment. |
|d. |natural rate of unemployment. |

ANS: C DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation TOP: Structural unemployment
MSC: Interpretive

6. Minimum-wage laws, unions, and efficiency wages contribute to
|a. |both structural unemployment and the natural rate of unemployment. |
|b. |neither structural unemployment nor the natural rate of unemployment. |
|c. |structural unemployment, but not the natural rate of unemployment. |
|d. |the natural rate of unemployment, but not structural unemployment. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Structural unemployment | Natural rate of unemployment MSC: Interpretive

7. Suppose that efficiency wages become more common in the economy. Economists would predict that this would
|a. |increase the quantity demanded and decrease the quantity supplied of labor, thereby decreasing the natural rate of |
| |unemployment. |
|b. |decrease the quantity demanded and increase the quantity supplied of labor, thereby increasing the natural rate of |
| |unemployment. |
|c. |increase the quantity demanded and decrease the quantity supplied of labor, thereby increasing the natural rate of |
| |unemployment. |
|d. |decrease the quantity demanded and increase the quantity supplied of labor, thereby decreasing the natural rate of |
| |unemployment. |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Efficiency wages | Natural rate of unemployment MSC: Interpretive

8. Efficiency wages
|a. |increase frictional unemployment by keeping wages above equilibrium. |
|b. |decrease frictional unemployment by keeping wages at equilibrium. |
|c. |increase structural unemployment by keeping wages above equilibrium. |
|d. |decrease structural unemployment by keeping wages at equilibrium. |

ANS: C DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Efficiency wages | Structural unemployment MSC: Interpretive

9. Sectoral changes
|a. |create frictional unemployment, while firms paying wages above equilibrium to attract a better pool of candidates |
| |creates structural unemployment. |
|b. |create structural unemployment, while firms paying wages above equilibrium to attract a better pool of candidates |
| |creates frictional unemployment. |
|c. |and firms paying wages above equilibrium to attract a better pool of candidates both create structural unemployment. |
|d. |and firms paying wages above equilibrium to attract a better pool of candidates both create frictional unemployment. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Efficiency wages | Sectoral shifts | Frictional unemployment | Structural unemployment
MSC: Interpretive

10. Job search
|a. |and firms paying wages above equilibrium to improve worker health both create frictional unemployment. |
|b. |creates frictional unemployment, while firms paying wages above equilibrium to improve worker health creates structural |
| |unemployment. |
|c. |creates structural unemployment, while firms paying wages above equilibrium to improve worker health creates frictional |
| |unemployment. |
|d. |and firms paying wages above equilibrium to improve worker health both create structural unemployment. |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Efficiency wages | Job search | Frictional unemployment | Structural unemployment
MSC: Interpretive

11. Minimum-wage laws
|a. |create frictional unemployment, while firms paying wages above equilibrium to reduce worker turnover creates structural |
| |unemployment. |
|b. |create structural unemployment, while firms paying wages above equilibrium to reduce worker turnover creates frictional |
| |unemployment. |
|c. |and firms paying wages above equilibrium to reduce worker turnover both create structural unemployment. |
|d. |and firms paying wages above equilibrium to reduce worker turnover both create frictional unemployment. |

ANS: C DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Efficiency wages | Minimum wage | Frictional unemployment | Structural unemployment
MSC: Interpretive

12. Unions
|a. |and firms paying wages above equilibrium to improve worker effort both create frictional unemployment. |
|b. |creates frictional unemployment, while firms paying wages above equilibrium to improve worker effort creates structural |
| |unemployment. |
|c. |creates structural unemployment, while firms paying wages above equilibrium to improve worker effort creates frictional |
| |unemployment. |
|d. |and firms paying wages above equilibrium to improve worker effort both create structural unemployment. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Unemployment and inflation
TOP: Efficiency wages | Unions | Frictional unemployment | Structural unemployment
MSC: Interpretive

13. The theory of efficiency wages explains why
|a. |setting wages at the equilibrium level may increase unemployment. |
|b. |it may be in the best interest of firms to offer wages that are above the equilibrium level. |
|c. |the most efficient way to pay workers is to pay them according to their skills. |
|d. |it is efficient for firms to set wages at the equilibrium level. |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

14. The theory of efficiency wages provides a possible explanation as to why
|a. |workers form unions. |
|b. |firms should try to reduce surpluses of labor. |
|c. |firms may be inclined to keep their workers’ wages above the equilibrium level. |
|d. |firms may be inclined to keep their workers’ wages below the equilibrium level. |

ANS: C DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

15. Efficiency wages, minimum-wage laws, and unions all
|a. |keep wages below the equilibrium level, causing a shortage of labor. |
|b. |keep wages below the equilibrium level, causing a surplus of labor. |
|c. |keep wages above the equilibrium level, causing a shortage of labor. |
|d. |keep wages above the equilibrium level, causing a surplus of labor. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Minimum wage | Unions | Efficiency wages MSC: Interpretive

16. Minimum-wage laws and unions are similar to each other but different from efficiency wages in that minimum-wage law and unions
|a. |cause unemployment, but efficiency wages do not. |
|b. |cause the quantity of labor supplied to exceed the quantity of labor demanded, but efficiency wages do not. |
|c. |cause wages to be above the equilibrium level. |
|d. |prevent firms from lowering wages in the presence of a surplus of workers. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Minimum wage | Unions | Efficiency wages MSC: Interpretive

17. Efficiency-wage theory suggests that paying
|a. |low wages might be profitable because they raise the efficiency of a firm’s workers. |
|b. |low wages might be profitable because they lower the efficiency of a firm’s workers. |
|c. |high wages might be profitable because they raise the efficiency of a firm’s workers. |
|d. |high wages might be profitable because they lower the efficiency of a firm’s workers. |

ANS: C DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

18. Quinn, the CEO of a corporation operating in a relatively poor country where wages are low, decides to raise the wages of her workers even though she faces an excess supply of labor. Her decision
|a. |might increase profits if it means that the wage is high enough for her workers to eat a nutritious diet that makes them|
| |more productive. |
|b. |will help eliminate the excess supply of labor. |
|c. |may cause her workers to increase shirking. |
|d. |All of the above are correct. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker health MSC: Applicative

19. The efficiency-wage theory of worker health is
|a. |more relevant for explaining unemployment in less developed countries than in rich countries. |
|b. |more relevant for explaining unemployment in rich countries than in less developed countries. |
|c. |equally relevant for explaining unemployment in less developed countries and in rich countries. |
|d. |not relevant for explaining unemployment. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker health MSC: Interpretive

20. Charlie is the owner of a firm that produces bottled water in Washington state. There are many other such firms in the area. Charlie decides that if he pays his workers a wage higher than the going market wage, his profits will increase. Which of the following is a likely explanation for his decision?
|a. |The higher the wage, the less often his workers will choose to leave his firm. |
|b. |The higher the wage, the lower will be the cost of obtaining needed supplies. |
|c. |The higher the wage, the more he can charge for his water. |
|d. |The higher the wage, the more he will have to monitor his workers for shirking. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker turnover MSC: Applicative

21. The efficiency-wage theory of worker turnover suggests that firms with
|a. |higher turnover will have higher production costs and higher profits. |
|b. |higher turnover will have higher production costs and lower profits. |
|c. |higher turnover will have lower production costs and higher profits. |
|d. |higher turnover will have lower production costs and lower profits. |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker turnover MSC: Interpretive

22. Maxine, the owner of a furniture company, decides to raise the wages of her workers even though she faces an excess supply of labor. Her decision
|a. |might increase profits if it attracts a better pool of workers to apply for her firm’s jobs. |
|b. |will increase the excess supply of labor. |
|c. |may increase the quality of her work force. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker quality MSC: Applicative

23. Ellen decides to hire some additional workers for her vinyl siding factory. The equilibrium wage is $14 per hour. Efficiency wage theory suggests that it is reasonable for Ellen to offer
|a. |$14 per hour. |
|b. |less than $14 per hour, since some people would be willing to work for less. |
|c. |less than $14 an hour to prevent shirking. |
|d. |more than $14 per hour, so as to attract a better pool of applicants. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker quality MSC: Applicative

24. The efficiency-wage theory of worker quality suggests that if firms respond to a surplus of labor by reducing the wage, then
|a. |the most competent applicants will likely apply for that firm’s jobs. |
|b. |the most competent applicants will likely not apply for that firm’s jobs. |
|c. |unemployment will increase. |
|d. |the quality of the firm’s work force will increase. |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker quality MSC: Interpretive

25. Daisy is the newly appointed CEO of a company that manufactures CD drives on an assembly line. Her staff has told her that the output the firm produces, given the number of workers employed, indicates that some workers may be shirking. According to efficiency wage theory, what should she do?
|a. |pay all workers more than the equilibrium wage rate |
|b. |pay all workers below the equilibrium wage rate to make up for the loss from shirking |
|c. |make sure that workers are getting paid exactly the equilibrium wage rate |
|d. |pay bonuses to workers who report the shirking of other workers |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets
TOP: Efficiency wages | Worker effort MSC: Applicative

26. A firm may pay efficiency wages in an attempt to
|a. |reduce incentives to shirk. |
|b. |reduce turnover. |
|c. |attract a well-qualified pool of applicants. |
|d. |All of the above are correct. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

27. Which of the following is not a reason that paying efficiency wages may increase a firm's profit?
|a. |Efficiency wages increase worker health and therefore increase worker productivity. |
|b. |Efficiency wages decrease worker turnover and therefore decrease hiring and training costs. |
|c. |Efficiency wages decrease worker shirking and therefore increase worker productivity. |
|d. |Efficiency wages decrease a country's natural rate of unemployment and therefore increase its standard of living. |

ANS: D DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive

28. Pollee is the CEO of a corporation that hires nonunion labor. According to the theory of efficiency wages, if she decides to pay her workers more than the competitive equilibrium wage, then
|a. |the profits of her firm might increase. |
|b. |the higher wages will induce her workers to shirk. |
|c. |the turnover of her workers may increase. |
|d. |she will face a shortage of labor. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Applicative

29. Four employers have justified their actions as follows. Whose logic is not consistent with the logic of efficiency wage theory?
|a. |Jay develops a new assembly line technology that limits the amount of shirking workers can do, so he reduces what he |
| |pays his employees so as to make it closer to the equilibrium wage. |
|b. |Kay pays her workers less than the equilibrium wage so they won't have the time or money to look for work somewhere |
| |else. |
|c. |Ray pays his workers in a developing country more than the going wage hoping that they will get a better diet and so be |
| |more productive. |
|d. |None of the above is consistent with the logic of efficiency wage theory. |

ANS: B DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Applicative

30. In the early 1900s, Henry Ford introduced
|a. |a high-wage policy, and this policy produced many of the effects predicted by efficiency-wage theory. |
|b. |a high-wage policy, and this policy produced none of the effects predicted by efficiency-wage theory. |
|c. |a low-wage policy, and this policy produced many of the effects predicted by efficiency-wage theory. |
|d. |a low-wage policy, and this policy produced none of the effects predicted by efficiency-wage theory. |

ANS: A DIF: 2 REF: 28-5
NAT: Analytic LOC: Labor markets TOP: Efficiency wages
MSC: Interpretive