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Basic Macroeconomic Definitions

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1. "Crowding Out" occurs when:
a) U.S. producers lose sales to foreign competition.
b) An increase in taxes results in a lower level of consumption spending.
c) Foreign interests buy government securities.
d) Government borrowing forces up interest rates and reduces the level of private investment spending.

2. Which of the following items would be counted in GDP?
a) The work of a stay at home dad.
b) The sale of a used car.
c) The soda you buy at the movie theater.
d) The flowers you personally grow and cut from your own garden to display in your home.

3. Suppose that Susan received a 3% raise last year, but her rent and other prices she had to pay Rose 5%. An economist would say that Susan's
a) real income rose, but her nominal income fell.
b) nominal income rose, but her money income fell.
c) money income rose, but her nominal income fell.
d) nominal income rose, but her real income fell.

4. Real GDP is gross GDP adjusted for:
a) population.
b) inflation
c) output levels
d) depreciation

5. Economists define a recession as when GDP declines by:
a) 2 months in a row.
b) 3 quarters in a row.
c) 2 years in a row.
d) 2 quarters in a row.

6. The most common measure of an economy's standard of living is:
a) median family income.
b) per capita income.
c) GDP per capita.
d) average household income.

7. Cyclical unemployment exists because
a) certain skills tend to become obsolete as the economy continually changes.
b) there are periodic reductions in the economy's total demand for goods and services.
c) it takes some time for new entrants into the labor force to find employment.
d) domestic producers have lost out to foreign competition.

8. In our economy, full employment (the natural rate of unemployment) means
a) a zero unemployment rate.
b) an unemployment rate of about 3%.
c) an unemployment rate of about 5%.
d) an unemployment rate of about 8%.

9. The MPS refers to:
a) that fraction of a change in income that is saved.
b) that fraction of a change in income that is spent.
c) the amount of saving per individual.
d) the amount of spending per individual.

10. Because of automatic stabilizers, the federal budget will
a) tend toward surplus during a recession.
b) tend toward a deficit during an economic expansion.
c) tend toward deficit during a recession.
d) always remain in balance.

11. Between the spring of 1990 and the spring of 1991, interest rates in the U.S. dropped by nearly two full percentage points. A possible explanation for this decrease in interest rates is:
a) the demand for money increased as the economy sank into a recession during the fall of 1990.
b) the implementation of an expansionary fiscal policy.
c) a major increase in the size of the federal budget.
d) the implementation of an expansionary monetary policy by the Federal Reserve.

12. You are a member of the Council of Economic Advisors, and you are concerned that the inflation rate is too high. Which of the following policies would you recommend?
a) a decrease in the money supply.
b) an increase in the money supply.
c) a decrease in income tax rates.
d) an increase in government spending.

13. Banks "create" money by:
a) printing paper currency.
b) accepting deposits and making loans.
c) creating checkable deposits.
d) selling securities.

14. When the Federal Reserve wants to reduce the equilibrium interest rate, it should:
a) increase the reserve requirement in order to expand the money supply.
b) sell securities on the open market in order to expand the money supply.
c) buy government securities in order to expand the money supply.
d) increase the discount rate in order to expand the money supply.

15. When the Federal Reserve sells government securities on the open market the lending ability of banks:
a) tends to decline; the money supply shrinks, and the interest rate tends to decline.
b) tends to decline; the money supply expands and the interest rate tends to rise.
c) increases; the monetary supply expands and the interest rate tends to fall.
d) tends to decline; the money supply shrinks and the interest rate tends to rise.

16. Economic variables that generally turn down before a recession begins and turn back up before the recovery starts are called:
a) leading indicators.
b) coincident indicators.
c) lagging indicators.
d) none of these.

17. Money serves all of the following functions except:
a) medium of exchange.
b) store of value.
c) unit of account.
d) measure of power.

18. If $1000 was deposited in a bank and the reserve requirement is 0.20, how much is available for loans?
a) $900
b) $910
c) $800
d) $930

19. If marginal propensity to save equals 0.25, then the marginal propensity to consume is:
a) 1.25.
b) 0.50.
c) 0.75.
d) 1.00.

20. Transfer payments are:
a) included in GDP.
b) not included in GDP.
c) included in both GDP and GNP.
d) none of these.

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Solution Preview

1. Answer (d): Crowding out happens when private investment decreases because of an increase in government investment, that causes interest rates to go up
2. Answer (c): Except for Soda bought at the movie theatre, none of the other items are counted in GDP
3. Answer (d): The 3% increase in pay is nominal income or money income, the 5% increase in prices of products would be due to inflation. Therefore, her purchasing power is lower and so her nominal income or money income has gone but her real income or purchasing power has gone down
4. Answer (b): Just like real and nominal income, real GDP is nominal or gross GDP adjusted for inflation
5. Answer (d): The official definition of recession is when the there is two consecutive quarters of downturn in economic activity
6. Answer (c): GDP per capita is a standard measure used to determine a country's standard of living
7. Answer (b): Cyclical ...

Solution Summary

This solution has answers to multiple choice questions on basic macroeconomic definitions and includes short explanations as well

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