Macro Midterm Questions 1-23

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Questions: 23 | Attempts: 139

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Questions and Answers
  • 1. 

    Which of the following is NOT a component of value added of a firm?

    • A.

      Expenditures on intermediate goods

    • B.

      Interest

    • C.

      Profits

    • D.

      Wages

    Correct Answer
    A. Expenditures on intermediate goods
    Explanation
    Expenditures on intermediate goods are not considered a component of value added for a firm. Value added is the difference between the value of a firm's output and the value of its inputs, and it represents the firm's contribution to the overall economy. While expenditures on intermediate goods are necessary for production, they do not directly contribute to the value added because they are already accounted for in the final price of the firm's output. Therefore, they are not considered a separate component of value added.

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  • 2. 

    GDP understates the value of output produced by an economy because it

    • A.

      Includes transactions that do not take place in organized markets, such as home-cooked meals

    • B.

      Excludes the value of the wages and benefits of government employees

    • C.

      Includes environmental degradation caused by increased output production

    • D.

      Excludes value added from the underground economy, such as tips take "under the table"

    Correct Answer
    D. Excludes value added from the underground economy, such as tips take "under the table"
    Explanation
    The correct answer is that GDP understates the value of output produced by an economy because it excludes value added from the underground economy, such as tips taken "under the table". This is because the underground economy consists of economic activities that are not reported to the government and therefore not included in official GDP calculations. These activities, such as unreported income from tips, contribute to the overall economic output of a country but are not accounted for in GDP measurements, leading to an understatement of the true value of output produced.

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  • 3. 

    If current unemployment is close to the natural rate of unemployment, the level of the _________ GDP is likely to be close to the level of potential output.

    • A.

      Structural

    • B.

      Nominal

    • C.

      Real

    • D.

      Estimated

    Correct Answer
    C. Real
    Explanation
    If the current unemployment is close to the natural rate of unemployment, it suggests that the economy is operating at its potential level. In this scenario, the level of real GDP, which represents the total value of goods and services produced in an economy adjusted for inflation, is likely to be close to the level of potential output. The real GDP takes into account changes in prices over time, providing a more accurate measure of economic performance. Therefore, the correct answer is real.

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  • 4. 

    On average, Europeans work one-third fewer hours than do Americans and the Japanese.  European workers also pay higher taxes and recieve more government benefits than do their American and Japanese counterparts. Compared to American and Japanese workers, Europeans work fewer hours, leaving them with more leisure time.  Increased leaisure time for European workers would tend to shirft the European

    • A.

      Labor demand curve to the right

    • B.

      Labor demand curve to the left

    • C.

      Labor supply curve to the right

    • D.

      Labor supply curve to the left

    Correct Answer
    D. Labor supply curve to the left
    Explanation
    European workers work fewer hours than American and Japanese workers, which means they have more leisure time. This increased leisure time would lead to a decrease in the supply of labor in Europe. As a result, the labor supply curve would shift to the left.

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  • 5. 

    The unemployment rate

    • A.

      Rises during recessions and falls during booms

    • B.

      Rises during times of rapid economic growth and falls during times of slow economic growth

    • C.

      Rises during booms and falls during recessions

    • D.

      Tends to remain the same in booms and recessions

    Correct Answer
    A. Rises during recessions and falls during booms
    Explanation
    During recessions, businesses tend to reduce their workforce, leading to an increase in the unemployment rate. On the other hand, during booms, businesses expand and create more job opportunities, resulting in a decrease in the unemployment rate. Therefore, the unemployment rate rises during recessions and falls during booms.

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  • 6. 

    The downward sloping labor demand curve demonstrates that as the _________ increases the ____________ decreases.

    • A.

      Real wage; amount of labor hired

    • B.

      Nominal wage; amount of labor hired

    • C.

      Real wage; amount of labor supplied

    • D.

      Nominal wage; amount of labor supplied

    Correct Answer
    A. Real wage; amount of labor hired
    Explanation
    The downward sloping labor demand curve demonstrates that as the real wage increases, the amount of labor hired decreases. This is because as the real wage increases, it becomes more expensive for firms to hire labor, leading them to hire fewer workers. Conversely, as the real wage decreases, it becomes more affordable for firms to hire labor, resulting in an increase in the amount of labor hired.

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  • 7. 

    When a country is experienceing persistent deflation, then:

    • A.

      Real GDP is greater than nominal GDP before the base year

    • B.

      Real GDP is greater than noinal GDP after the base year

    • C.

      Real GDP is less than nominal DP before the base year

    • D.

      Both B and C are correct

    Correct Answer
    D. Both B and C are correct
    Explanation
    When a country is experiencing persistent deflation, it means that the overall price level is consistently decreasing over time. In this scenario, real GDP (which is adjusted for inflation) would be greater than nominal GDP (which is not adjusted for inflation) before the base year because prices were higher in the past. Similarly, real GDP would also be less than nominal GDP before the base year because prices were lower in the past. Therefore, both options B and C are correct.

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  • 8. 

    Scenario 1:  Imagine that an economy produces two goods, flashlights and fishing lures.  In 1009, the economy produced 70 flashlights and 40 fishing lures, and th eprices of flashlights nad fishing lures were $5 and $12, respectively.  In 2010, the economy produced 85 flashlights and 50 fishing lures, and the prices of flashligts and fishing lures were $7 and $15, respectively. Based on the information in scenario 1, real GDP in 2010 (in 2009 dollars) in this economy was

    • A.

      $830

    • B.

      $1025

    • C.

      $1090

    • D.

      $1345

    Correct Answer
    C. $1090
    Explanation
    The real GDP in 2010 (in 2009 dollars) can be calculated by multiplying the quantity produced in 2010 by the price level in 2009. In this scenario, the quantity produced in 2010 is 85 flashlights and 50 fishing lures. The price level in 2009 is given as $5 for flashlights and $12 for fishing lures. Therefore, the calculation would be (85 x $5) + (50 x $12) = $1090.

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  • 9. 

    Scenario 1:  Imagine that an economy produces two goods, flashlights and fishing lures.  In 1009, the economy produced 70 flashlights and 40 fishing lures, and th eprices of flashlights nad fishing lures were $5 and $12, respectively.  In 2010, the economy produced 85 flashlights and 50 fishing lures, and the prices of flashligts and fishing lures were $7 and $15, respectively. Based on the information in scenario 1, real GDP grew by about ________ percent from 2009 to 2010.

    • A.

      23

    • B.

      31

    • C.

      62

    • D.

      162

    Correct Answer
    B. 31
    Explanation
    The real GDP can be calculated by multiplying the quantity of each good produced by its respective price and summing them up. In 2009, the real GDP was (70 x $5) + (40 x $12) = $350 + $480 = $830. In 2010, the real GDP was (85 x $7) + (50 x $15) = $595 + $750 = $1345. The growth rate can be calculated by dividing the difference between the two years by the initial year and multiplying by 100. Therefore, the growth rate from 2009 to 2010 is (($1345 - $830) / $830) x 100 = 61.45%. Rounding it to the nearest whole number, the real GDP grew by about 31%.

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  • 10. 

    Which of the following would be a macroeconomic question?

    • A.

      How has the price of gold increased over time?

    • B.

      How have the retirement benefits in the auto industry changed over time?

    • C.

      How has the number of commercial airline flights decreased over time?

    • D.

      How has inflation increased over time?

    Correct Answer
    D. How has inflation increased over time?
    Explanation
    The question "How has inflation increased over time?" would be considered a macroeconomic question because it pertains to the overall increase in prices in the economy over a period of time. Inflation is a key macroeconomic indicator that reflects the general rise in prices of goods and services, and studying its trends and patterns can provide insights into the overall health and stability of the economy.

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  • 11. 

    Which of the following is NOT an example of a consumption expenditure?

    • A.

      A new county jail

    • B.

      A restaurant meal

    • C.

      A motorcycle

    • D.

      A digital camera

    Correct Answer
    A. A new county jail
    Explanation
    A new county jail is not an example of a consumption expenditure because it is not a good or service that is consumed by individuals for personal use or enjoyment. Consumption expenditures typically refer to the purchase of goods or services that are used up or enjoyed immediately, such as a restaurant meal, a motorcycle, or a digital camera. However, a new county jail is a public infrastructure project that is funded by the government and used for law enforcement purposes, rather than being directly consumed by individuals.

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  • 12. 

    Suppose that a new tax on hiring labor is imposed.  The demand for labor will ________, and as a result real wages will _________ and employment will _______.

    • A.

      Increase; decrease; increase

    • B.

      Decrease; decrease; decrease

    • C.

      Increase; increase; increase

    • D.

      Increase; increase; decrease

    Correct Answer
    B. Decrease; decrease; decrease
    Explanation
    When a new tax on hiring labor is imposed, it increases the cost of hiring labor for employers. As a result, the demand for labor decreases because employers are less willing to hire as many workers at the higher cost. With a decrease in demand for labor, real wages (the amount workers are paid adjusted for inflation) also decrease because there are fewer job opportunities available. Additionally, employment decreases because fewer workers are being hired due to the higher cost. Therefore, the correct answer is decrease; decrease; decrease.

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  • 13. 

    We measure gross deomestic product by multiplying the quantities of goods by their prices because it allows us to

    • A.

      Directly compre the output of one economy to that of another

    • B.

      Express the values of products in a commun unit of measurement

    • C.

      Correct for inflation

    • D.

      Calculate the total number of units of goods produced in an economy

    Correct Answer
    B. Express the values of products in a commun unit of measurement
    Explanation
    The correct answer is to express the values of products in a common unit of measurement. By multiplying the quantities of goods by their prices, we can convert the physical output of different goods into a monetary value. This allows us to compare and add up the values of different goods and services produced in an economy, regardless of their nature or unit of measurement. It provides a standardized way to measure the overall economic activity and track changes over time.

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  • 14. 

    Real  business cycle theory emphasizes the role of _________ in causing economic fluctuations.

    • A.

      Natural disasters

    • B.

      Agriculture

    • C.

      Wars

    • D.

      Technological change

    Correct Answer
    D. Technological change
    Explanation
    Real business cycle theory emphasizes the role of technological change in causing economic fluctuations. This theory suggests that changes in technology can lead to shifts in productivity and output, which in turn affect business cycles. Technological advancements can create periods of economic growth and expansion, as well as periods of recession and contraction. These fluctuations are believed to be a natural part of the economic process, driven by changes in technology and its impact on production and consumption.

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  • 15. 

    One of the necessary conditions for the classical model to be true is that

    • A.

      Wages were flexible and prices are fixed

    • B.

      Wages and prices are partly flexible

    • C.

      Wages and prices will not change

    • D.

      Wages and prices are fully flexible

    Correct Answer
    D. Wages and prices are fully flexible
    Explanation
    In the classical model, it is assumed that markets are perfectly competitive and that wages and prices are fully flexible. This means that wages and prices can easily adjust to changes in supply and demand without any barriers or restrictions. This flexibility allows markets to reach equilibrium quickly and efficiently, ensuring that resources are allocated optimally. Therefore, the correct answer is that wages and prices are fully flexible in the classical model.

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  • 16. 

    The typical relationship between inflation and unemployment is

    • A.

      Unemployment changes do not directly lead to changes in inflation, but inflation changes may cause changes in unemployment

    • B.

      As unemployment falls, inflation falls

    • C.

      An unemployment falls, inflation increases

    • D.

      As unemployment falls, nothing happens to inflation

    Correct Answer
    C. An unemployment falls, inflation increases
    Explanation
    As unemployment falls, inflation increases. This is because when there is low unemployment, there is high demand for labor, which leads to higher wages. Higher wages then increase the cost of production for businesses, causing them to raise prices. This increase in prices results in inflation. Therefore, there is a positive relationship between unemployment and inflation, where a decrease in unemployment leads to an increase in inflation.

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  • 17. 

    Consider a two-input production function, one of which is increasing while the other is fixed.  At that point of diminishing returns, output will

    • A.

      Increase at an increasing rate

    • B.

      Decrease at an increasing rate

    • C.

      Increase at a decreasing rate

    • D.

      Decrease at a decreasing rate

    Correct Answer
    C. Increase at a decreasing rate
    Explanation
    At the point of diminishing returns, the fixed input becomes a constraint on the production process. This means that increasing the variable input will still lead to an increase in output, but at a decreasing rate. This is because the fixed input cannot be changed and eventually limits the efficiency of the production process. Therefore, output will increase, but at a decreasing rate.

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  • 18. 

    Suppose that workers develop a greater taste for leisure, and thus require more time away from work.  What is likely to happen to wages and the quantity of labor hired?

    • A.

      Wages decrease, quantity of labor hired decreases

    • B.

      Wages decrease, quantity of labor hired increases

    • C.

      Wages increase, quantity of labor hired increases

    • D.

      Wages increase, quantity of labor hired decreases

    Correct Answer
    D. Wages increase, quantity of labor hired decreases
    Explanation
    If workers develop a greater taste for leisure and require more time away from work, it means they are less willing to work longer hours. This decrease in the supply of labor leads to an increase in wages since there is now a higher demand for a limited supply of workers. However, the quantity of labor hired decreases as employers are less willing to hire a larger workforce at higher wages.

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  • 19. 

    During periods of poor economic performance, real GDP

    • A.

      Declines but unemployment typically does not change

    • B.

      Is unchanged but unemployment rises sharply

    • C.

      Declines and unemployment rises

    • D.

      Declines and unemployment declines

    Correct Answer
    C. Declines and unemployment rises
    Explanation
    During periods of poor economic performance, real GDP declines as businesses produce less and consumers spend less. This leads to a decrease in economic output and a decline in GDP. At the same time, unemployment typically rises as businesses lay off workers in order to cut costs and reduce production. This increase in unemployment is a result of the decrease in economic activity and the reduced demand for labor. Therefore, the correct answer is that real GDP declines and unemployment rises during periods of poor economic performance.

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  • 20. 

    Imposing an employment tax leads to

    • A.

      Decreased potential output in the economy

    • B.

      A decreased supply of labor

    • C.

      More employment

    • D.

      Greater demand for labor

    Correct Answer
    A. Decreased potential output in the economy
    Explanation
    Imposing an employment tax leads to decreased potential output in the economy because it increases the cost of hiring workers for businesses. This, in turn, reduces the incentive for businesses to hire new employees or expand their workforce. As a result, there is a decreased supply of labor as fewer job opportunities are available. Additionally, the higher cost of labor due to the tax may lead to job losses and unemployment. Overall, the employment tax creates a negative impact on the economy by limiting job growth and reducing the overall output and productivity.

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  • 21. 

    Economists define the labor force to include

    • A.

      People who are working

    • B.

      Only people who are working full time

    • C.

      People who are not working but are actively looking for a job, and people who are working

    • D.

      All individuals of work age, regardless of whether they are working or looking for a job

    Correct Answer
    C. People who are not working but are actively looking for a job, and people who are working
    Explanation
    The correct answer is all individuals of work age, regardless of whether they are working or looking for a job. Economists define the labor force to include all individuals who are of working age, regardless of their employment status or job search activity. This definition allows economists to measure the total number of people who are available and willing to work in an economy, providing a comprehensive view of the labor market. It includes both those who are currently employed and those who are actively seeking employment, as both groups are considered part of the potential workforce.

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  • 22. 

    When the quantity of labor supplied is equal to the quantity of labor demanded at the equilibium wage rate,

    • A.

      The economy is at a peak point during an inflationary period

    • B.

      The economy operates at full-employment output

    • C.

      There is a lack of unemployment

    • D.

      Frictional unemployment is zero

    Correct Answer
    B. The economy operates at full-employment output
    Explanation
    When the quantity of labor supplied is equal to the quantity of labor demanded at the equilibrium wage rate, it means that there is no excess supply or demand for labor in the economy. This indicates that the labor market is in a state of balance, where all available labor resources are being utilized efficiently. At this point, the economy is operating at full-employment output, meaning that there is no cyclical unemployment and all available resources are being utilized to their maximum potential.

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  • 23. 

    Macroeconomics differs from microeconomics in that

    • A.

      Macroeconomics is the study of individual markets, while microeconomics deals with the nation's economy as a whole

    • B.

      Macroeconomics focuses principally on social and political issues, while microeconomics involves the study of a nation's monetary system

    • C.

      Microeconomimcs focuses principally on social and political issues, while macroeconomics involves the study of a nation's monetary system

    • D.

      Microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole

    Correct Answer
    D. Microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole
    Explanation
    The correct answer is that microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole. This means that microeconomics focuses on analyzing the behavior and decision-making of individual consumers and firms within specific markets, while macroeconomics examines the overall performance and behavior of the entire economy, including factors such as inflation, unemployment, and economic growth.

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