Econ Final Study Guide

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  • 1/38 Questions

    In an economic expansion, people used their charge cards to purchase many goods. Now the economy is in a recession and people must use much of their reduced incomes to pay back debts. If employees manufacturing the goods people used to buy are laid off, they will suffer from:

    • Cyclical unemployment.
    • Structural unemployment.
    • Permanent unemployment.
    • Frictional unemployment.
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About This Quiz

This econ final study guide covers key aspects of economic cycles, including phases of the business cycle, unemployment types, and effects of economic changes on employment. It assesses understanding of economic fundamentals crucial for students in economics courses.

Econ Final Study Guide - Quiz

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  • 2. 

    A general rule is that a recession is a decline in real GDP lasting at least:

    • One year.

    • Six months.

    • Three months.

    • One month.

    Correct Answer
    A. Six months.
    Explanation
    A recession is typically defined as a significant decline in economic activity, particularly in terms of real GDP. The correct answer is six months because it is generally accepted that a recession is characterized by a sustained period of economic decline lasting at least six months. This duration allows for a more accurate assessment of the overall economic situation and distinguishes a recession from shorter-term fluctuations in economic output.

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  • 3. 

    A measure comparing the prices of consumer goods and services that a household typically purchases to the prices of those goods and services purchased in a base year is

    • The GDP deflator.

    • The consumer price index.

    • The price level.

    • Inflation.

    Correct Answer
    A. The consumer price index.
    Explanation
    The correct answer is the consumer price index. The consumer price index is a measure that compares the prices of consumer goods and services that a household typically purchases to the prices of those goods and services purchased in a base year. It is used to track changes in the cost of living over time and to measure inflation. The GDP deflator, on the other hand, measures the overall price level of all goods and services produced in an economy, while the price level is a more general term referring to the average prices of goods and services in an economy.

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  • 4. 

    Fiscal policy

    • Uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP

    • Can affect employment and prices, but not the level of GDP

    • Can affect employment and the level of GDP, but not the price level

    • Uses the federal government's powers over the money supply to affect employment, the price level, and GDP

    Correct Answer
    A. Uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP
    Explanation
    Fiscal policy refers to the use of the federal government's powers of spending and taxation to influence various aspects of the economy, including employment, the price level, and GDP. By adjusting government spending and taxation levels, policymakers can stimulate or restrain economic activity. This can be done by increasing government spending and reducing taxes to boost employment and stimulate economic growth. Conversely, policymakers can reduce government spending and increase taxes to curb inflation and slow down economic growth. Therefore, fiscal policy has the ability to affect employment, the price level, and GDP.

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  • 5. 

    A supply-side policy approach to achieving both lower prices and full employment would be to:

    • Increase the growth of the money supply.

    • Manipulate aggregate supply by a decreasing taxes and reducing government regulation.

    • Wait until natural market forces establish full employment.

    • Change government spending or taxes to affect aggregate demand

    Correct Answer
    A. Manipulate aggregate supply by a decreasing taxes and reducing government regulation.
    Explanation
    Manipulating aggregate supply by decreasing taxes and reducing government regulation can lead to lower prices and full employment. When taxes are decreased, it incentivizes businesses to invest and expand, which increases the supply of goods and services. Reducing government regulation can also make it easier for businesses to operate and grow, further increasing aggregate supply. By increasing the availability of goods and services, prices can be lowered, benefiting consumers. Additionally, as businesses expand and hire more workers, it can lead to full employment or lower unemployment rates.

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  • 6. 

    Which of the following statements is true?

    • The simple money multiplier equals one over the required reserve ratio.

    • Required reserves is the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.

    • Total reserves is equal to required reserves plus excess reserves.

    • All of the above.

    Correct Answer
    A. All of the above.
    Explanation
    The statement "The simple money multiplier equals one over the required reserve ratio" is true because the simple money multiplier is calculated by dividing 1 by the required reserve ratio. The statement "Required reserves is the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed" is also true as required reserves refer to the minimum amount of funds that banks are required to keep either in their vaults or on deposit with the central bank. Lastly, the statement "Total reserves is equal to required reserves plus excess reserves" is true because total reserves consist of both required reserves and any excess reserves that banks may hold. Therefore, all of the above statements are true.

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  • 7. 

    Monetary policy involves:

    • The use of money and interest rate controls to influence the macroeconomy.

    • Changes in government spending.

    • Changes in taxes.

    • Shifting the aggregate supply curve.

    Correct Answer
    A. The use of money and interest rate controls to influence the macroeconomy.
    Explanation
    Monetary policy involves the use of money and interest rate controls to influence the macroeconomy. This means that central banks, such as the Federal Reserve in the United States, can adjust interest rates and the money supply to stimulate or slow down economic growth. By increasing or decreasing interest rates, central banks can influence borrowing costs, which in turn affects consumer spending and investment. Additionally, central banks can also adjust the money supply by buying or selling government bonds, which affects the overall availability of money in the economy. These measures are used to manage inflation, stabilize prices, and promote economic stability.

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  • 8. 

    Which of the following groups has an interest in restricting free trade?

    • Workers in import-competing markets.

    • Producers in import-competing markets.

    • Communities where workers in import-competing markets live.

    • All of the above.

    Correct Answer
    A. All of the above.
    Explanation
    All of the above groups have an interest in restricting free trade. Workers in import-competing markets may fear losing their jobs or facing lower wages due to competition from imported goods. Producers in import-competing markets may want to limit foreign competition to protect their market share and profits. Communities where workers in import-competing markets live may be concerned about the negative impact on local economies and job opportunities. Therefore, all three groups have a vested interest in restricting free trade.

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  • 9. 

    The business cycle consists of four phases. At the top we have:

    • Recovery, followed by depression, and then recession followed by a peak.

    • Recovery, followed by a recession, and then peak followed by depression.

    • Peak, then a depression, followed by recovery, and then recession

    • Peak, then a recession, followed by depression, and finally, recovery.

    Correct Answer
    A. Peak, then a recession, followed by depression, and finally, recovery.
    Explanation
    The correct answer is "peak, then a recession, followed by depression, and finally, recovery." This is because the business cycle typically follows a pattern where economic activity reaches a peak, then declines into a recession, which is a period of significant economic decline. This is followed by a period of depression, which is a prolonged and severe recession. Finally, the economy starts to recover and move towards growth again.

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  • 10. 

    Frictional unemployment refers to:

    • People who are out of work and don’t have the required job skills.

    • Short periods of unemployment needed to best match right jobs to the right job seekers.

    • People who are unemployed during certain seasons of the year

    • Unemployment related to the ups and downs of the business cycle

    Correct Answer
    A. Short periods of unemployment needed to best match right jobs to the right job seekers.
    Explanation
    Frictional unemployment refers to short periods of unemployment needed to best match right jobs to the right job seekers. This type of unemployment occurs when individuals are in between jobs or are actively searching for new job opportunities. It is a natural part of the labor market as people transition between different jobs or careers. During this time, individuals may be unemployed due to factors such as searching for better job opportunities, relocating, or taking time to assess their skills and qualifications for different positions.

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  • 11. 

    Which of the following is a reason for the downward slope of an aggregate demand curve?

    • Real balance or wealth effect.

    • Interest-rate effect.

    • Foreign trade effect.

    • All of the above are reasons.

    Correct Answer
    A. All of the above are reasons.
    Explanation
    All of the above are reasons for the downward slope of an aggregate demand curve. The real balance or wealth effect suggests that as prices decrease, the purchasing power of money increases, leading to increased consumption. The interest-rate effect suggests that as prices decrease, interest rates decrease, leading to increased investment and consumption. The foreign trade effect suggests that as prices decrease, exports become more competitive and imports decrease, leading to increased net exports.

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  • 12. 

    If there are 150 million people in the total labor force of which 135 million are employed, then the unemployment rate is:

    • 10%

    • 12%

    • 20%

    • 90%

    Correct Answer
    A. 10%
    Explanation
    The unemployment rate is calculated by dividing the number of unemployed individuals by the total labor force and multiplying by 100. In this case, the number of unemployed individuals would be 150 million (total labor force) minus 135 million (employed), which equals 15 million. Dividing 15 million by 150 million and multiplying by 100 gives us 10%. Therefore, the correct answer is 10%.

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  • 13. 

    The discount rate is the interest rate charged by:

    • The Federal Reserve when it lends money to private banks

    • A private bank when it lends money to another private bank

    • A private bank when it lends money to commercial customers

    • A regional Fed bank when it lends money to another regional Fed bank

    Correct Answer
    A. The Federal Reserve when it lends money to private banks
    Explanation
    The discount rate is the interest rate charged by the Federal Reserve when it lends money to private banks. This rate is set by the Federal Reserve as a way to control the money supply and influence economic activity. By changing the discount rate, the Federal Reserve can encourage or discourage borrowing by private banks, which in turn affects the amount of money available in the economy.

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  • 14. 

    The idea that lower prices increase the buying power of money and lead to more spending on real GDP, is known as the:

    • Real balance effect.

    • Interest rate effect.

    • Foreign purchases effect.

    • Net export effect.

    Correct Answer
    A. Real balance effect.
    Explanation
    The real balance effect refers to the concept that lower prices can increase the purchasing power of money, leading to an increase in spending on real GDP. This means that when prices decrease, consumers are able to buy more goods and services with the same amount of money, which can boost economic activity and contribute to an increase in real GDP.

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  • 15. 

    Which of the following is not a function of money?

    • To provide a double coincidence of wants

    • To act as a medium of exchange

    • To act as a unit of account

    • To act as a store of value

    Correct Answer
    A. To provide a double coincidence of wants
    Explanation
    The double coincidence of wants refers to the situation where two parties have goods or services that the other party desires, creating a mutual exchange. Money, on the other hand, acts as a medium of exchange, unit of account, and a store of value. It facilitates transactions and allows for the exchange of goods and services without the need for a direct barter system. Therefore, providing a double coincidence of wants is not a function of money.

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  • 16. 

    If on Tuesday you can buy $1 = 125 Yen and on Wednesday you can buy $1 = 120 Yen,

    • Both the U.S. dollar and the yen have appreciated

    • Both the U.S. dollar and the yen have depreciated

    • The U.S. dollar has appreciated and the yen has depreciated

    • The U.S. dollar has depreciated and the yen has appreciated

    Correct Answer
    A. The U.S. dollar has depreciated and the yen has appreciated
    Explanation
    The correct answer is the U.S. dollar has depreciated and the yen has appreciated. This is because the exchange rate for the U.S. dollar to yen has decreased from 125 yen to 120 yen, indicating that it takes fewer yen to buy one U.S. dollar. When a currency depreciates, it means that it has lost value compared to other currencies. Therefore, the U.S. dollar has depreciated in relation to the yen. On the other hand, the yen has appreciated because it now takes more U.S. dollars to buy one yen.

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  • 17. 

    The duties of the Federal Reserve include all of the following except one. Which is the exception?

    • Regulating banks' reserve ratios

    • Extending loans to banks on occasion

    • Controlling the monetary system of the U.S.

    • Providing gold in exchange for Federal Reserve notes

    Correct Answer
    A. Providing gold in exchange for Federal Reserve notes
    Explanation
    The Federal Reserve is responsible for regulating banks' reserve ratios, extending loans to banks on occasion, and controlling the monetary system of the U.S. However, it does not provide gold in exchange for Federal Reserve notes. This is because the U.S. dollar is no longer backed by gold, and the Federal Reserve operates on a fiat currency system.

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  • 18. 

    The aggregate supply curve:

    • Shows the level of real GDP produced in the economy at different possible price levels during a period of time.

    • Is relatively flat in the beginning and then gets steeper

    • Is upward-sloping

    • All of the above.

    Correct Answer
    A. All of the above.
    Explanation
    The aggregate supply curve shows the relationship between the level of real GDP produced in the economy and the possible price levels during a specific time period. It is upward-sloping because as prices increase, producers are incentivized to supply more goods and services. Additionally, the curve is relatively flat in the beginning and then gets steeper, indicating that at lower levels of real GDP, an increase in prices has a smaller effect on the quantity supplied, while at higher levels of real GDP, an increase in prices has a larger effect on the quantity supplied. Therefore, all of the statements provided in the answer are correct.

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  • 19. 

    Which of the following is not part of the Federal Reserve System?

    • The President’s Council of Economic Advisors.

    • Board of Governors.

    • Federal Open Market Committee.

    • 12 Federal Reserve District Banks.

    Correct Answer
    A. The President’s Council of Economic Advisors.
    Explanation
    The President's Council of Economic Advisors is not part of the Federal Reserve System. The Federal Reserve System is composed of the Board of Governors, the Federal Open Market Committee, and the 12 Federal Reserve District Banks. The President's Council of Economic Advisors, on the other hand, is an advisory council that provides economic advice to the President of the United States. While it may collaborate with the Federal Reserve System, it is not officially a part of it.

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  • 20. 

    Which of the following is not a function of the Federal Reserve System?

    • To control the money supply.

    • To lend money to households.

    • To supervise and regulate banks.

    • To aid in the check clearing process.

    Correct Answer
    A. To lend money to households.
    Explanation
    The Federal Reserve System is responsible for controlling the money supply, supervising and regulating banks, and aiding in the check clearing process. However, lending money to households is not a function of the Federal Reserve System. The primary role of the Federal Reserve is to maintain the stability and integrity of the banking system, rather than directly lending money to individual households.

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  • 21. 

    The economy is fully employed when there is zero

    • Seasonal unemployment.

    • Frictional unemployment.

    • Structural unemployment.

    • Cyclical unemployment

    Correct Answer
    A. Cyclical unemployment
    Explanation
    Cyclical unemployment refers to the unemployment that occurs due to fluctuations in the business cycle. When the economy is fully employed, it means that there is no cyclical unemployment because all individuals who are willing and able to work are employed. This is different from seasonal unemployment, which occurs due to seasonal fluctuations in demand for certain industries, frictional unemployment, which is the temporary unemployment that occurs when individuals are transitioning between jobs, and structural unemployment, which is caused by a mismatch between the skills of workers and the available job opportunities.

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  • 22. 

    The aggregate demand curve:

    • Shows the level of real GDP purchased in the economy at different possible price levels during a period of time.

    • Shows the level of real GDP supplied in the economy at different possible price levels during a period of time.

    • Shifts to the left whenever there is an increase in aggregate expenditures.

    • Slopes upward.

    Correct Answer
    A. Shows the level of real GDP purchased in the economy at different possible price levels during a period of time.
    Explanation
    The aggregate demand curve shows the level of real GDP purchased in the economy at different possible price levels during a period of time. This means that it represents the total amount of goods and services that households, businesses, and the government are willing and able to purchase at various price levels. It is important to note that the aggregate demand curve is downward sloping, indicating that as prices decrease, the quantity of real GDP demanded increases, and vice versa.

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  • 23. 

    Suppose the reserve requirement is 10 percent or 0.1. An excess reserves of $10,000 results in new money creation of

    • $1,000 in new checkable deposits

    • $10,000 in new checkable deposits

    • $100,000 in new checkable deposits

    • No new money creation

    Correct Answer
    A. $100,000 in new checkable deposits
    Explanation
    When the reserve requirement is 10 percent, it means that banks are required to hold 10 percent of their deposits as reserves and can lend out the remaining 90 percent. In this scenario, an excess reserves of $10,000 means that the bank can lend out $90,000 (90 percent of $100,000). This $90,000 can then be deposited into other banks, creating new checkable deposits. Since the initial excess reserves of $10,000 can lead to multiple rounds of lending and deposit creation, the total new checkable deposits created can be much larger. In this case, it would be $100,000 in new checkable deposits.

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  • 24. 

    Which of the following is a necessary characteristic of money?

    • It must serve as a medium of exchange

    • Its value much be backed by gold and silver

    • The government must declare it to have value

    • It must be printed by the government

    Correct Answer
    A. It must serve as a medium of exchange
    Explanation
    A necessary characteristic of money is that it must serve as a medium of exchange. This means that it should be widely accepted as a form of payment for goods and services. Money acts as a medium through which transactions can take place, allowing individuals to exchange goods and services without the need for bartering or direct exchange. Without this characteristic, money would not be able to fulfill its role as a facilitator of trade and commerce.

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  • 25. 

    The buying and selling of government securities is the responsibility of the:

    • Twelve regional Federal Reserve banks

    • Executive Branch of the government

    • Board of Governors of the Federal Reserve

    • Federal Open Market Committee

    Correct Answer
    A. Federal Open Market Committee
    Explanation
    The Federal Open Market Committee (FOMC) is responsible for buying and selling government securities. The FOMC is a committee within the Federal Reserve System and consists of members from the Board of Governors and the regional Federal Reserve banks. The FOMC conducts open market operations, which involve buying and selling government securities to influence the money supply and interest rates in the economy. This helps the Federal Reserve in implementing monetary policy and achieving its goals of promoting price stability and maximum employment.

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  • 26. 

    Which of the following is true?

    • International trade makes it possible for a country's consumption possibilities to exceed its production possibilities.

    • International specialization in production should take place according to the law of comparative advantage

    • Some nations impose tariffs and quotas in the form of trade restrictions

    • All of the above are true

    Correct Answer
    A. All of the above are true
    Explanation
    International trade allows a country to consume goods and services that it may not be able to produce domestically, thereby expanding its consumption possibilities beyond its production possibilities. Additionally, the law of comparative advantage suggests that countries should specialize in producing goods and services in which they have a lower opportunity cost compared to other countries, leading to increased efficiency and overall benefits from trade. Finally, it is true that some nations impose trade restrictions such as tariffs and quotas to protect domestic industries or address trade imbalances. Therefore, all of the statements in the answer are true.

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  • 27. 

    M1 is defined as

    • Coins, currency, checkable deposits and traveler’s checks

    • Coins, currency, checkable deposits, traveler’s checks and savings accounts

    • Coins, currency, checkable deposits and traveler’s checks and small time deposits

    • It is the same as M2 and M3

    Correct Answer
    A. Coins, currency, checkable deposits and traveler’s checks
    Explanation
    M1 is defined as the sum of coins, currency, checkable deposits, and traveler's checks. This means that M1 includes physical forms of money such as coins and currency, as well as easily accessible funds in bank accounts that can be withdrawn or used for transactions. It does not include savings accounts or small time deposits, which are included in other measures of money supply such as M2 and M3.

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  • 28. 

    Expansionary monetary policy will:

    • Increase the level of AD

    • Decrease the Level of AD

    • Have no impact on AD

    • Affects the level of AS

    Correct Answer
    A. Increase the level of AD
    Explanation
    Expansionary monetary policy involves increasing the money supply, lowering interest rates, and encouraging borrowing and spending. This leads to an increase in aggregate demand (AD) as consumers and businesses have more money to spend and invest. The increased spending stimulates economic activity, leading to higher levels of output, employment, and prices. Therefore, the correct answer is that expansionary monetary policy will increase the level of AD.

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  • 29. 

    If a money is acceptable because the government requires that it be accepted in payment for debt, the money is

    • Legal tender

    • Commodity money

    • Guaranteed to be a good store of wealth

    • Convertible to a valuable commodity

    Correct Answer
    A. Legal tender
    Explanation
    Legal tender refers to a form of money that is recognized by the government as a valid means of payment for debts. This means that if a money is considered legal tender, it must be accepted by creditors as a form of payment. In this case, the government requires that the money be accepted for debt settlement, making it legal tender. Commodity money refers to a type of money that has intrinsic value, such as gold or silver, which is not applicable here. The other options, being a good store of wealth or convertible to a valuable commodity, are not directly related to the concept of legal tender.

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  • 30. 

    The Fed can increase the money supply by

    • Raising the required reserve ratio

    • Selling bonds to banks

    • Lowering the federal funds rate

    • Raising the discount rate

    Correct Answer
    A. Lowering the federal funds rate
    Explanation
    Lowering the federal funds rate can increase the money supply because it encourages banks to borrow more money from the Federal Reserve. When the federal funds rate is lowered, it becomes cheaper for banks to borrow money, which in turn allows them to lend more money to businesses and individuals. This increased lending leads to an expansion of the money supply in the economy.

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  • 31. 

    The purchase and sale of government securities by the Fed is referred to as:

    • Open-market operation

    • Closed-market operations

    • Discounting

    • Expansionary fiscal policy

    Correct Answer
    A. Open-market operation
    Explanation
    The purchase and sale of government securities by the Fed is known as open-market operations. This refers to the buying and selling of government bonds and securities in the open market to control the money supply and interest rates. Open-market operations are a key tool used by central banks to implement monetary policy and influence economic conditions.

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  • 32. 

    A business cycle is the:

    • Period of time in which there is continuous growth in the economy.

    • Period of time in which there are two phases, which are: peak and depression.

    • Economic fluctuations of real GDP along a long-term growth trend.

    • Period of time in which a business is established and ceases operations.

    Correct Answer
    A. Economic fluctuations of real GDP along a long-term growth trend.
    Explanation
    The correct answer is "economic fluctuations of real GDP along a long-term growth trend." This explanation accurately describes a business cycle as the period of time when there are fluctuations in the economy's real GDP, meaning the value of goods and services produced, over a long-term growth trend. This implies that the economy experiences both periods of expansion and contraction, rather than continuous growth or a specific phase like peak or depression.

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  • 33. 

    Price indexes like the CPI are calculated using a base year. The term base year refers to:

    • The first year that price data are available.

    • Any year in which inflation was higher than 5 percent.

    • The most recent year in which the business cycle hit the trough.

    • A specifically chosen reference year.

    Correct Answer
    A. A specifically chosen reference year.
    Explanation
    Price indexes like the CPI are calculated using a base year. This base year is not necessarily the first year that price data are available or any year in which inflation was higher than 5 percent. It is also not necessarily the most recent year in which the business cycle hit the trough. Instead, the base year is a specifically chosen reference year that serves as a benchmark for comparing price changes over time. It provides a consistent point of comparison for measuring inflation or deflation in subsequent years.

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  • 34. 

    If taxes decline by $200 million and the MPC = 0.8, then equilibrium real GDP demanded

    • Declines by $200 million

    • Increases by $200 million

    • Increases by $800 million

    • Increases by $1000 million

    Correct Answer
    A. Increases by $800 million
    Explanation
    When taxes decline by $200 million and the MPC (marginal propensity to consume) is 0.8, it means that individuals will have more disposable income. With a higher disposable income, people tend to spend a larger portion of it, which increases consumption. The MPC of 0.8 indicates that for every additional dollar of income, individuals will spend 80 cents. Therefore, a decrease in taxes of $200 million will result in an increase in consumption of $160 million (0.8 * $200 million). This increase in consumption will lead to an increase in aggregate demand and ultimately an increase in equilibrium real GDP demanded. Since the increase in consumption is $160 million, the total increase in equilibrium real GDP demanded is $800 million (5 times the increase in consumption due to the multiplier effect).

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  • 35. 

    Inflation is an increase in:

    • Prices of every single product in the economy.

    • Homes, autos and basic resources.

    • The general and average price level of products.

    • None of the above.

    Correct Answer
    A. The general and average price level of products.
    Explanation
    Inflation refers to the overall increase in the general and average price level of products in an economy. This means that the prices of various goods and services across different sectors will rise over time. It does not necessarily imply that every single product will experience a price increase, nor does it specifically focus on homes, autos, or basic resources. Therefore, the correct answer is "the general and average price level of products."

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  • 36. 

    This year the Smith family income went up by 10%. In an economy with an inflation rate of 5%, which of the following is correct?

    • The Smith’s nominal income and real income have both fallen.

    • The Smith’s nominal income and real income have both risen.

    • The Smith’s nominal income has increased and their real income has fallen.

    • The Smith’s nominal income has decreased and their real income has risen.

    Correct Answer
    A. The Smith’s nominal income and real income have both risen.
    Explanation
    The Smith family's nominal income has increased by 10% this year, meaning their income has gone up in terms of actual dollars. Additionally, even though there is an inflation rate of 5%, their real income has still risen because the increase in their nominal income is greater than the inflation rate. Therefore, both their nominal income and real income have risen.

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  • 37. 

    Suppose the consumer price index (CPI) for Year X is 130. This means the average price of goods and services is:

    • Currently $130.

    • 130 percent more in Year X than in the base year.

    • 130 percent more in the base year than in Year X.

    • 30 percent more in Year X than in the base year.

    Correct Answer
    A. 30 percent more in Year X than in the base year.
    Explanation
    The consumer price index (CPI) measures the average price of goods and services over time. In this case, a CPI of 130 means that prices have increased by 30 percent compared to the base year. Therefore, the correct answer is that prices are 30 percent more in Year X than in the base year.

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  • 38. 

    If the MPC equals 0.8 and G increases by $200 million, real GDP demanded will increase by

    • $160 million

    • $200 million

    • $1000 million

    • $1250 million

    Correct Answer
    A. $1000 million
    Explanation
    When the marginal propensity to consume (MPC) is 0.8, it means that for every additional dollar of income, individuals will spend 80 cents. Therefore, if government spending (G) increases by $200 million, the increase in real GDP demanded will be equal to the multiplier effect of the MPC. The multiplier effect is calculated as 1 divided by (1 - MPC), which in this case is 1 divided by (1 - 0.8) = 1 divided by 0.2 = 5. So, the increase in real GDP demanded will be $200 million multiplied by the multiplier effect of 5, which equals $1000 million.

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  • Dec 11, 2009
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