11-1 Macroeconomics Instructor Jen Dinsmore Hanson .docx

11-1
Macroeconomics
Instructor: Jen Dinsmore Hanson
Homework Assignment
Chapter 11
Multiple Choice Questions
1. Say's law
A. was a basic pillar of classical economics.
B. was a basic pillar of Keynesian economics.
C. was formulated during the Great Depression.
D. proves that we can never have full employment.
2. Which question did John Maynard Keynes pose for the
classical economists?
A. What if their policies led to inflation?
B. What if savings and investment were not equal?

C. What if government intervention did not cure a recession?
D. John Maynard Keynes posed none of these questions
3. At equilibrium GDP
A. Savings = investment, but aggregate demand does not equal
aggregate supply.
B. Savings = investment and aggregate demand = aggregate
supply.
C. Savings does not equal investment and aggregate demand
does not equal aggregate supply.
D. Savings does not equal investment, but aggregate demand =
aggregate supply.
4. Laissez-faire economics was advocated by
A. both Keynes and the classicals.
B. neither Keynes nor the classicals.
C. the classicals, but not by Keynes.
D. Keynes, but not by the classicals.
5. When the average price level in the United States, relative to
the average price levels in
other countries, rises, this tends to

A. raise imports and exports.
B. lower imports and exports.
C. raise imports and lower exports.
D. lower imports and raise exports.
6. According to the classicals, our economy can produce beyond
the full employment output
A. only in the short run.
B. only in the long run.
C. in both the short run and the long run.
D. in neither the short run nor the long run.
11-2
7. Keynes and the classicals used _____ aggregate demand and
supply apparatuses and came
to _____ conclusions.
A. the same; the same
B. different; different
C. the same; different
D. different; the same

8. John Maynard Keynes
A. agreed with classical writers that strong automatic pressures
drive market economies to full
employment.
B. focused on attaining the long-run macroeconomic goal of
high, but stable economic
growth.
C. argued that a market economy might become stuck in a short-
run equilibrium in which
substantial capital and labor lay idle.
D. argued that short-run equilibrium occurs only at full
employment.
9. The notion that everything the economy produces is
purchased
A. sums up Say's law.
B. can be restated as "demand creates its own supply."
C. refers to the real balance effect.
D. was a critical assumption Keynes made in explaining the
worldwide depression of the
1930s.
10. If the economy is in the vertical portion of the AS curve,

what will be the effect of an
increase in the price level on output produced?
A. Output will increase at a very rapid rate
B. Output will not change
C. Output will only slightly increase
D. Output change cannot be predicted from information given
11. The wealth or real balances effect indicates that
A. An increase in the price level will increase the demand for
money, increase interest rates,
and reduce consumption and investment spending
B. A lower price level will decrease the real value of many
financial assets and therefore
cause a decline in spending
C. A higher price level will increase the real value of many
D. A higher price level will decrease the real value of many
12. Classical economists and monetarists perceive

A. investors' expectations about returns on investment as
unstable.
B. large investment swings as responses to small changes in
interest rates.
C. that the best way to cure unemployment is to start a war.
D. that the proper cure for unemployment is active fiscal policy.
11-3
13. Classical economists believed that
A. if saving exceeded investment, prices and interest rates
would rise as business accumulated
unwanted inventories.
B. flexible prices and wages could not restore an economy to
full employment if the interest
rate were rigid.
C. flexible interest rates, wages, and prices would assure full
employment.
D. voluntary unemployment reflected economic inefficiency.
E. all unemployment was involuntary.
14. The curve showing the amount of real output, or real GDP,
that will be made available by

sellers at various price levels is called the
A. aggregate demand curve.
B. real gross domestic investment curve.
C. aggregate supply curve.
D. Keynesian cross.
E. aggregate individual demand curve.
15. Which of the following is incorrect?
A. As the American average price level rises, American goods
become relatively more
expensive so that our exports fall and our imports rise.
B. As the average price level falls, the interest rate declines,
and interest-rate sensitive
spending increases.
C. When the average price level increases, real balances
increase, businesses and households
find themselves wealthier and therefore increase their spending.
D. An increase in aggregate supply tends to increase real
domestic output and reduce the
average price level.
16. The aggregate demand curve shows a(n)

A. positive relationship between prices and quantities.
B. inverse relationship between the price level and the
aggregate quantity demanded.
C. independent relationship between the price level and the
aggregate quantity demanded.
D. inverse relationship between the product price and the
quantity of a good demanded.
17. The Keynesian point of view suggests that
A. supply creates its own demand.
B. demand creates its own supply.
C. the market is always at equilibrium.
D. full employment is the natural result of market forces.
E. wage and price controls can halt deflationary pressures.
18. Which of the following will cause a change in aggregate
demand?
A. A change in consumer demand
B. A change in the demand for investment goods
C. A change in government spending
D. All of the choices will cause a change in aggregate demand.

11-4
19. If the aggregate supply curve is upward sloping, an increase
in aggregate demand will
A. increase real GDP at a constant level of prices.
B. reduce real GDP but increase the price level.
C. increase real GDP but reduce the price level.
D. reduce both real GDP and the price level.
E. increase both real GDP and the price level.
20. Real money balances
A. refer to the amounts of nominal money that individuals hold.
B. are computed by deflating nominal money assets by the
average price level.
C. refer to the amounts of American money that an individual
holds relative to gold or foreign
currencies.
D. are measured by currency holdings rather than holdings in
checking accounts.
E. are identical to nominal money balances in the long run.
21. The classical macroeconomic model argues that the
economy has built-in forces that

automatically eliminate unemployment and quickly move the
economy to its full employment
level of real GDP. Which assumption is critical to this
argument?
A. Rigid wages and prices
B. Flexible wages and prices
C. Natural rate of unemployment
D. Profit motive
E. None of the choices are correct.
22. The long-run aggregate supply curve, according to the
classical model,
A. is vertical at full employment GDP.
B. slopes gently upward.
C. is horizontal at the equilibrium price level.
D. may be downward sloping.
E. slopes steeply upward.
11-5
23. Curve XY represents ____________.

A. short-run aggregate demand
B. long-run aggregate demand
C. short-run aggregate supply
D. long-run aggregate supply
24. Curve YZ represents ____________.
A. short-run aggregate demand
B. long-run aggregate demand
C. short-run aggregate supply
D. long-run aggregate supply
25. Aggregate demand will decrease when there are
A. decreases in government spending.
B. increases in consumer and business confidence.
C. increases in inflationary expectations.
D. decreases in the price level.
E. declines in the demand for money.
26. The foreign purchases effect suggests that a decrease in the
American price level relative
to those in other countries will

A. shift the aggregate demand curve leftward.
B. shift the aggregate supply curve leftward.
C. decrease American exports and increase American imports.
D. increase American exports and decrease American imports.
11-6
27. If aggregate demand shifts from AD1 to AD2,
A. both output and the price level will rise.
B. output will rise and the price level will fall.
C. output will rise and the price level will remain the same.
D. both output and the price level will fall.
E. output will fall and the price level will rise.
A. both output and the price level will rise.
B. output will rise and the price level will fall.
C. output will rise and the price level will remain the same.
D. both output and the price level will fall.
E. output will fall and the price level will rise.

A. output will rise and the price level will fall.
B. output will fall and the price level will rise.
C. neither output nor the price level will change.
D. the price level will rise and output will remain unchanged.
E. output will rise and the price level will remain unchanged.
30. A self-regulating market
A. eliminates shortages or surpluses through price changes.
B. can eliminate shortages quickly, but eliminates surpluses
slowly.
C. renders Say's law invalid.
D. occurs only in labor markets.
E. occurs only in credit markets.
31. Suppose the nation is in a recession. As a result, the current
macroeconomic equilibrium
occurs along the flat portion of the aggregate supply curve. A
moderate increase in aggregate
demand is likely to
A. increase the equilibrium price level with little effect on
equilibrium real GDP.

B. increase equilibrium real GDP with little effect on the price
level.
C. cause the price level to fall.
D. decrease employment.
11-7
32. If the aggregate demand curve shifts to the right,
A. the economy is in equilibrium.
B. people are willing to buy less real output at every price level.
C. people are willing to buy more real output at every price
level.
D. people are willing to buy more real output at a lower price
level.
33. According to classical macroeconomic theory, the flexible
interest rate
A. is the incentive that encourages businesses to obtain credit.
B. will tend to fall when the quantity of credit demanded
exceeds the quantity of credit
supplied.
C. will tend to rise when the supply of credit exceeds the
demand for credit.

D. ensures that saving cannot exceed investment spending for
extended periods of time.
34. Adherents of Say's law maintained that
A. demand created its own supply.
B. people work in order to earn income to spend on
consumption.
C. people work in order to earn income to save.
D. demand is unaffected by supply.
35. According to Keynes, the primary cause of large-scale
unemployment is
A. high prices.
B. low prices.
C. high exports.
D. low exports.
E. inadequate aggregate demand.
36. When we draw an aggregate demand curve, what do we put
on the vertical axis?
A. The total quantity of goods and services demanded
B. The full employment output
C. The quantity of money

D. The price level
37. Which of the following statements best reflects Keynes'
view of the aggregate supply
curve?
A. It tends to be vertical, because the economy naturally tends
toward equilibrium positions of
full employment.
B. It tends to be upward sloping (but not vertical), because as
we try to produce more output
out of our given resources, some labor has to work overtime at
higher pay, driving up costs
and prices.
C. It tends to be horizontal during periods when substantial
amounts of resources are
unemployed.
D. It tends to slope downward and to the right reflecting
people's natural tendency to postpone
purchases when they lose their jobs.
E. None of the choices are true of Keynes' view of the aggregate
supply curve.

11-8
38. The real wealth effect provides a partial explanation for why
the aggregate demand curve
slopes downward. Which of the following statements best
explains the real wealth effect?
A. At a lower price level domestically produced items are
relatively less expensive than
foreign goods and therefore are in greater demand.
B. At a lower price level the real interest rate tends to be lower,
and thus the quantity of
investment goods demanded is larger.
C. At a lower price level consumers will buy less because of a
reduction in the real money
supply.
D. At a lower price level the purchasing power of accumulated
savings is larger, and thus
consumers will purchase more goods.
39. If the rate of interest did not equate saving and investment
and total output was greater
than total spending, the classical economist argued, competition
would tend to force
A. product and resource prices down.

B. product prices up and resource prices down.
C. product prices up and resource prices up.
D. product prices down and resource prices up.
40. The major difference between the Keynesian model and the
classical theory of
employment is that
A. the interest rate will not always equalize savings and
investment.
B. not everything produced will necessarily be purchased.
C. saving and investing are done by different people for
different reasons.
D. wages and prices are assumed to be flexible downwards.
41. According to Keynes, at equilibrium, aggregate demand will
always equal which of the
following?
A. Aggregate supply
B. C + S
C. C + I
D. All of the choices are correct.
42. Assume the aggregate demand curve intersects the aggregate
supply curve in its

intermediate range. A decrease in the aggregate supply curve
will
A. increase the price level and decrease real GDP.
B. decrease the price level and increase real GDP.
C. increase both the price level and real GDP.
D. decrease both the price level and real GDP.
11-9
43. Who said our economy "seems capable of remaining in a
chronic condition of subnormal
activity for a considerable period without any marked tendency
either toward recovery or
toward complete collapse"?
A. David Ricardo
B. Jean Baptiste Say
C. Wassily Leontief
D. John Maynard Keynes
E. Sidney Greenstreet
44. The classical school

A. was the dominant school of economic thought after the Great
Depression.
B. advocated laissez-faire.
C. was mainly concerned with aggregate demand.
D. believed that about half of the money saved would be
invested.
45. Jean Baptiste Say believed in all of the following EXCEPT
that
A. Supply creates its own demand.
B. People work so that they can save.
C. Everything produced in an economy is sold.
D. The normal state of economic affairs is full employment.
46. Each of the following is consistent with the classical theory
EXCEPT
A. wages and prices are flexible.
B. the economy is always at full employment.
C. supply creates its own demand.
D. laissez-faire.
47. Which of the following is true?
A. Keynes asked the question: If supply creates its own demand,
why are we in a worldwide

depression?
B. According to Keynes, if savings were greater than
investment, interest rates would fall,
bringing the economy back to full employment.
C. Keynes believed that wages and prices were flexible.
D. Keynes believed the economy was basically stable.
48. The classical school
A. was the dominant school of economic thought until the Great
Depression.
B. was the dominant school of economic thought after the Great
Depression.
C. believed that the economy was basically unstable.
D. believed wages and prices were rigid downwards.
E. All of the choices are true of the classical school.
11-10
49. Keynes believed
A. increases in investment expenditures are due to lower
interest rates.
B. increases in investment expenditures are due to high profit

expectations.
C. increases in investment expenditures are due to excessive
funds in the loanable funds
market.
D. since supply creates its own demand, increases in investment
expenditures creates
additional supply and therefore more demand and earnings for
the businesses.
50. What economic events enabled most countries to escape the
Great Recession of 2007-
2009?
A. Interest rates fell because of excess savings.
B. Wage rates declined.
C. Fiscal policy was enacted using tax cuts and/or increases in
government spending.
D. Prices declined.
10.
value:
3.00 points
Problem 4-19 Schedule of cash receipts [LO2]
Watt's Lighting Stores made the following sales projections for

the next six months. All sales are credit sales.
March
$
48,000
June
$ 52,000
April
54,000
July
60,000
May
43,000
August
62,000
Sales in January and February were $51,000 and $50,000,
respectively.
Experience has shown that of total sales, 10 percent are
uncollectible, 35 percent are collected in the month of sale, 45
percent are collected in the following month, and 10 percent are
collected two months after sale.
(a)
Prepare a monthly cash receipts schedule for the firm for March
through August. (Omit the "$" sign in your response.)
WATT'S LIGHTING STORES
Cash Receipts Schedule
January
February

March
April
May
June
July
August
Sales
$
$
$
$
$
$
$
$
Collections of current sales
Collections of prior month's sales
Collections of sales 2 months earlier

Total cash receipts
$
$
$
$
$
$

(b)
Of the sales expected to be made during the six months from
March through August, how much will still be uncollected at the
end of August? How much of this is expected to be collected
later? (Omit the "$" sign in your response.)
Amount
Uncollected
$
Expected to be collected
$
VOLT BATTERY COMPANY
Summary of Cash payments
Dec.
Jan.
Feb.
March
April
May
June

Units produced
Material cost
$
$
$
$
$
$
Labor cost
Overhead cost
Interest

Employee bonuses
Total cash payments
$
$
$
$
$
$

11.
value:
4.00 points
Problem 4-23 Schedule of cash payments [LO2]
The Volt Battery Company has forecast its sales in units as
follows:
January
2,300
May
2,850
February
2,150
June
3,000
March
2,100

July
2,700
April
2,600
Volt Battery always keeps an ending inventory equal to 130% of
the next month's expected sales. The ending inventory for
December (January's beginning inventory) is 2,990 units, which
is consistent with this policy.
Materials cost $12 per unit and are paid for in the month
after purchase. Labor cost is $5 per unit and is paid in the
month the cost is incurred. Overhead costs are $13,500 per
month. Interest of $9,500 is scheduled to be paid in March, and
employee bonuses of $14,700 will be paid in June.
(a)
Prepare a monthly production schedule for January through
June.
VOLT BATTERY COMPANY
Production Schedule
Jan.
Feb.
March
April
May
June
July
Forecasted unit sales

Desired ending inventory
Beginning inventory
Units to be produced

(b)
Prepare a monthly summary of cash payments for January
through June. Volt produced 2,100 units in December. (Omit
the "$" sign in your response.)
12.
value:
5.00 points
Problem 4-25 Complete cash budget [LO2]
Harry's Carryout Stores has eight locations. The firm wishes to
expand by two more stores and needs a bank loan to do this. Mr.
Wilson, the banker, will finance construction if the firm can
present an acceptable three-month financial plan for January
through March. The following are actual and forecasted sales

figures:
Actual
Forecast
Additional Information
November
$ 270,000
January
$ 420,000
April forecast
$ 410,000
December
360,000
February
460,000
March
420,000
Of the firm's sales, 30 percent are for cash and the remaining 70
percent are on credit. Of credit sales, 40 percent are paid in the
month after sale and 60 percent are paid in the second month

after the sale. Materials cost 40 percent of sales and are
purchased and received each month in an amount sufficient to
cover the following month's expected sales. Materials are paid
for in the month after they are received. Labor expense is 25
percent of sales and is paid for in the month of sales. Selling
and administrative expense is 25 percent of sales and is also
paid in the month of sales. Overhead expense is $31,500 in cash
per month.
Depreciation expense is $10,700 per month. Taxes of $8,700
will be paid in January, and dividends of $5,500 will be paid in
March. Cash at the beginning of January is $94,000, and the
minimum desired cash balance is $89,000.
(a)
Prepare a schedule of monthly cash receipts for January,
February and March. (Omit the "$" sign in your response.)
HARRY’S CARRY-OUT STORES
Cash Receipts Schedule
November
December
January
February
March
April
Sales
$
$
$
$
$
$
Cash sales

Credit sales
Collections in the month
after credit sales)
Collections two months
after credit sales)
Total cash receipts

$
$
$
(b)
Prepare a schedule of monthly cash payments for January,
February and March. (Omit the "$" sign in your response.)
Cash Payments Schedule
January
February
March
Payments for purchases
$
$
$

Labor expense
Selling and admin. exp.
Overhead
Taxes
Dividends

Total cash payments
$
$
$
(c)
Prepare a schedule of monthly cash budget with borrowings and
repayments for January, February and March. (Leave no cells
blank - be certain to enter "0" wherever required. Negative
amounts should be indicated by a minus sign. Omit the "$" sign
in your response.)
Cash Budget

January
February
March
Total cash receipts
$
$
$
Total cash payments

Net cash flow
Beginning cash balance
Cumulative cash balance

Monthly loan or (repayment)
Cumulative loan balance
Ending cash balance
$
$
$
13.
value:
1.00 points
Problem 4-28 Percent-of-sales method [LO3]

The Manning Company has financial statements as shown
below, which are representative of the company’s historical
average.
The firm is expecting a 40 percent increase in sales next year,
and management is concerned about the company’s need for
external funds. The increase in sales is expected to be carried
out without any expansion of fixed assets, but rather through
more efficient asset utilization in the existing store. Among
liabilities, only current liabilities vary directly with sales.
Income Statement
Sales
$
300,000
Expenses
246,800
Earnings before interest and taxes
$
53,200
Interest
9,100
Earnings before taxes
$
44,100
Taxes
17,100

Earnings after taxes
$
27,000
Dividends
$
5,400
Balance Sheet
Assets
Liabilities and Stockholders' Equity
Cash
$
9,000
Accounts payable
$
29,000
Accounts receivable
56,000
Accrued wages
2,250
Inventory
70,000
Accrued taxes
4,750

Current assets
$
135,000
Current liabilities
$
36,000
Fixed assets
86,000
Notes payable
9,100
Long-term debt
25,500
Common stock
125,000
Retained earnings
25,400

Total assets
$
221,000
Total liabilities and
stockholders' equity
$
221,000
Using the percent-of-sales method, determine the amount of
external financing needs, or a surplus of funds required by the
company. (Hint: A profit margin and payout ratio must be found
from the income statement.) (Do not round intermediate
calculations. Input the amount as positive value. Omit the "$"
sign in your response.)
The firm $ in .
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16.
value:

1.00 points
Problem 5-8 Cash break-even analysis [LO2]
Air Purifier, Inc., computes its break-even point strictly on the
basis of cash expenditures related to fixed costs. Its total fixed
costs are $2,410,000, but 10 percent of this value is represented
by depreciation. Its contribution margin (price minus variable
cost) for each unit is $32. How many units does the firm need to
sell to reach the cash break-even point? (Round your answer to
the nearest whole number.)
Cash break-even point
units
23.
value:
2.00 points
Problem 5-20 Combining operating and financial leverage
[LO5]
Sinclair Manufacturing and Boswell Brothers Inc. are both
involved in the production of brick for the homebuilding
industry. Their financial information is as follows:
Capital Structure
Sinclair
Boswell
Debt @ 11%
$
1,260,000

0
Common stock, $10 per share
840,000
$
2,100,000
Total
$
2,100,000
$
2,100,000
Common shares
84,000
210,000
Operating Plan
Sales (61,000 units at $20 each)
$
1,220,000
$

1,220,000
Less: Variable costs
976,000
610,000
($
16 per unit)
($
10 per unit)
Fixed costs
0
311,000
Earnings before interest and taxes (EBIT)
$
244,000
$
299,000

(a)
If you combine Sinclair’s capital structure with Boswell’s
operating plan, what is the degree of combined leverage? (Enter
only numeric value rounded to 2 decimal places.)
Degree of combined leverage
(b)
If you combine Boswell’s capital structure with Sinclair’s
operating plan, what is the degree of combined leverage? (Enter
only numeric value.)
Degree of combined leverage
(d)
In part b, if sales double, by what percentage will EPS
increase? (Omit the "%" sign in your response.)
EPS will increase by
%
24.
value:
3.00 points

Problem 5-23 Leverage and sensitivity analysis [LO6]
Dickinson Company has $11,840,000 in assets. Currently half of
these assets are financed with long-term debt at 9.2 percent and
half with common stock having a par value of $8. Ms. Smith,
vice-president of finance, wishes to analyze two refinancing
plans, one with more debt (D) and one with more equity (E).
The company earns a return on assets before interest and taxes
of 9.2 percent. The tax rate is 45 percent.
Under Plan D, a $2,960,000 long-term bond would be sold at
an interest rate of 11.2 percent and 370,000 shares of stock
would be purchased in the market at $8 per share and retired.
Under Plan E, 370,000 shares of stock would be sold at $8
per share and the $2,960,000 in proceeds would be used to
reduce long-term debt.
(a)
Compute the earnings per share for the current plan and the two
new plans. (Round your answers to 2 decimal places. Omit the
"$" sign in your response.)
Current Plan
Plan D
Plan E
Earnings per share
$
$
$
(b-1)
Compute the earnings per share if return on assets fell to 4.60
percent. (Round your answers to 2 decimal places. Leave no
cells blank - be certain to enter "0" wherever required. Negative

amounts should be indicated by a minus sign. Omit the "$" sign
in your response.)
Current Plan
Plan D
Plan E
Earnings per share
$
$
$
(b-2)
Which plan would be most favorable if return on assets fell to
4.60 percent? Consider the current plan and the two new plans.
Plan D
Current Plan
Plan E
(b-3)
Compute the earnings per share if return on assets increased to
14.2 percent. (Round your answers to 2 decimal places. Omit
the "$" sign in your response.)
Current Plan
Plan D
Plan E

Earnings per share
$
$
$
(b-4)
Which plan would be most favorable if return on assets
increased to 14.2 percent? Consider the current plan and the two
new plans.
Plan D
Plan E
Current Plan
(c-1)
If the market price for common stock rose to $10 before the
restructuring, compute the earnings per share. Continue to
assume that $2,960,000 in debt will be used to retire stock in
Plan D and $2,960,000 of new equity will be sold to retire debt
in Plan E. Also assume that return on assets is 9.2
percent. (Round your answers to 2 decimal places. Omit the "$"
sign in your response.)
Current Plan
Plan D
Plan E
Earnings per share
$

$
$
(c-2)
If the market price for common stock rose to $10 before the
restructuring, which plan would then be most attractive?
Current Plan
Plan E
Plan D
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2150
2100
2600
2850
3000
43000
2700

2795
2730
3380
3705
3900
3510
2990
2795
2730
52000
2750
3705
3900
2495
2085
2750
3555
3045

2610
60000
62000
16800
18900
(Click to select)
(Click to select)
15050
.40
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1.01
18200
21000
21700
22500
21600
24300
19350

51000
18200
21000
5100
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4800
5400
4300
5200
92400
99500
50000
87150
94950
103500
109900
31900
33900

48000
Macroeconomics
Homework Assignment
Chapter 10
1. Junior Ozark dresses for job interviews in bib overalls, a red
lumberjack shirt, and torn
basketball sneakers. He has been looking for a job as an
investment banker ever since he dropped
out of high school. He is now 46 years old and has never held a
job. Mr. Ozark is _____
unemployed.
A. frictionally
B. structurally
C. cyclically
D. psychologically

2. Troughs occur
A. two or three times a year.
B. two or three times in every business cycle.
C. at the bottom of business cycles.
D. about once every 25 years.
3. Which statement is true?
A. People collecting unemployment benefits are not counted as
unemployed.
B. The Bureau of Labor Statistics compiles the unemployment
rate from the data they collect
from the unemployment insurance officers.
C. The unemployment rate is calculated by dividing the number
of unemployed by the number of
employed.
D. None of the statements are true.
4. During the early 1980s the changes that occurred in inflation
and unemployment rates
A. suggest that disinflation can occur only if unemployment
increases significantly.

B. support the notion of a stable Phillips curve.
C. suggest that both inflation and unemployment can be
consistently reduced by dramatically
increasing interest rates.
5. Among the following cases, which one would be considered
to be unemployed? Someone
who
A. worked three days in the last month but is now out of work.
B. is ready, willing, and able to work, but gave up looking for
work three months ago.
C. reported to the state employment office last week but is not
very enthusiastic about finding a
job.
6. Kimberly quit her job as a computer programmer, spent two
weeks in Hawaii, and is now
looking for (and expects to soon find) another job. She is _____
unemployed.
A. psychologically
B. structurally
C. frictionally

D. cyclically
7. In 1973 the OPEC countries
A. lowered the price of oil by 50%.
B. raised the price of oil by 50%.
C. doubled the price of oil.
D. quadrupled the price of oil.
8. Which of the following is NOT one of a group of variables
that make up the Index of Leading
Indicators?
A. New building permits issued
B. The unemployment rate
C. Index of stock prices
D. The money supply
E. The average workweek of production workers in
manufacturing

9. Which statement is true about the rate of inflation?
A. It was higher in the 1960s than in the 1970s.
B. It was higher in the 1970s than in the 1960s.
C. It was about the same in the 1960s as in the 1970s.
10. Point X is in the _____ phase of the business cycle.
A. prosperity
B. recovery
C. recession
D. depression
E. acceleration
11. Point Y is in the _____ phase of the business cycle.
A. prosperity
B. recovery
C. depression
D. recession

E. acceleration
12. The recovery phase of the business cycle is _____ followed
by the prosperity phase.
A. never
B. sometimes
C. usually
D. always
13. Mikhail was president of a large country almost 20 years
ago. He is still looking for a similar
position. Mikhail is _____ unemployed.
A. seasonally
B. frictionally
C. cyclically
D. structurally
14. Deflation is
A. hyperinflation.
B. a constant rate of inflation.
C. a slow-down in the rate of inflation.

D. zero inflation.
E. a decline in the average price level
15. Which one of these periods had the highest rate of inflation?
A. 1945-1948.
B. 1957-1960.
C. 1961-1964.
D. 1969-1972.
E. 1984-1986.
16. A computerized job bank would be most effective in
reducing _____ unemployment.
A. seasonal
B. frictional
C. cyclical
D. structural
17. The _____ the unemployment rate and the _____ the rate of
inflation, the higher the misery
index.
A. higher; higher
B. lower; lower

C. higher; lower
D. lower; higher
18. Which one of these groups is counted among the
unemployed?
A. Discouraged workers
B. People collecting unemployment benefits
C. People working part time
D. People out of the labor force
19. A person who is not in the labor force and not actively
looking for a job is
A. employed.
B. unemployed.
C. underemployed.
D. discouraged.
20. In the song "My Hometown" by Bruce Springsteen, the
foreman at the textile mill by the
comin' back." This is an example of
A. frictional unemployment.

B. cyclical unemployment.
C. structural unemployment.
D. seasonal unemployment.
21. The supply-side shocks that affected the United States in
1973 and 1979 were the result of
A. government tax policies.
B. union wage demands.
C. OPEC policies regarding the availability and price of crude
oil.
D. periods of stagflation in which the United States had
achieved low or negative rates of growth
in real GDP.
E. increases in aggregate supply.
22. The Phillips curve tradeoff implies
A. that if the curve is stable, society must accept increases in
inflation in exchange for decreases
in unemployment.
B. that if the curve is unstable, society must accept increases in
inflation in exchange for
decreases in unemployment.

C. that if the curve is stable, society must accept increases in
inflation in exchange for increases
in unemployment.
D. that if the curve is unstable, society must accept falling
unemployment when inflation falls.
23. Statement I: Unemployment was higher in the 1970s than in
the 1960s.
Statement II: Unemployment was higher in the 1980s than in the
1970s.
A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.
24. Each of these was a recession year except
A. 1974.
B. 1980.
C. 1982.
D. 1986.
E. 1990.
25. Recently there has been high unemployment in the steel
industry due to a recession. What

type of unemployment is the steel industry experiencing?
A. Frictional unemployment
B. Cyclical unemployment
C. Natural unemployment
D. Structural unemployment
26. The Phillips curve shows the relationship between various
rates of unemployment and
A. interest rates.
B. real wage rates.
C. inflation.
D. the money supply.
E. investment demand.
27. A current value for the CPI of 125 means that the
A. consumer must now pay $1.25 to purchase goods that cost
$1.00, on the average, in the base
year.
B. average price level currently is 125 times higher than the
average price level during the base

year.
C. purchasing power of a given money income is 25 percent
larger during the base year than
when the index was formulated.
D. purchasing power of money has increased 125 percent over
time.
28. People are classified as unemployed if
A. they choose to exit the labor force because they cannot find a
job.
B. they are not working for voluntary reasons.
C. they are willing and able to work but cannot find a job.
D. they do not have a job because they choose to work at home
for no pay.
29. Stagflation involves simultaneous high levels of
A. unemployment and interest rates.
B. interest rates and inflation.
C. unemployment and inflation.
D. economic growth and inflation.
E. stagnation and degeneracy.
30. Frictional unemployment is

A. the lowest rate of unemployment that can be maintained
without accelerating the rate of
inflation.
B. caused by a mismatch between the skills of unemployed
workers and the skills required in
jobs that have openings.
C. associated with downturns in the pace of economic activity.
D. caused because time is needed to enter the labor force to find
a job or to move from one job to
another.
31. Statement I: The most widely used forecasting device is the
index of leading indicators.
Statement II: The index of leading economic indicators usually
turns downward as a recession
approaches.
32. Structural unemployment results from
A. changes in business inventories.

B. changes in interest rates.
C. changes in both technology and the changing demand for
products.
D. all of the choices/statements are true.
33. Statement I: It is possible for the unemployment rate to
decline while the total employment
declines.
Statement II: It is possible for the unemployment rate to decline
while the number of
unemployed people stays the same.
34. Statement I: People who have looked for a job six months
ago but are not looking now (and
are not working) are counted as discouraged workers, and
therefore are officially unemployed.
Statement II: Because of imperfect information in the labor
market, there will always be some

frictional unemployment.
35. Use the following choices regarding the various types of
unemployment to describe this
situation. Joe is looking for work as a machinist after his and
most other machinist jobs were
eliminated, replaced by computer-operated machines.
A. Frictional unemployment
B. Structural unemployment
C. Natural unemployment
D. Cyclical unemployment
E. None of the choices are correct
36. The unemployment rate is a fraction whose numerator is
A. the total population.
B. the number of employed.
C. the number of unemployed.

D. the difference between the total population and the number
of employed.
37. Tired of looking for work with nothing to show for it, Bill
has given up on the job search.
Bill is
A. a contingent worker.
B. part of the frictionally unemployed.
C. voluntarily unemployed.
D. a discouraged worker.
E. a displaced worker.
38. Statement I: Cyclical unemployment is the term given to
workers who have been laid off
because their skills are no longer in demand.
Statement II: At any given time about five percent of the labor
force is frictionally unemployed.

39. What does NOT occur in a fully employed economy?
A. Cyclical unemployment
B. Discouraged workers
C. Frictional unemployment
D. Structural unemployment
40. The Consumer Price Index measures
A. changes in the money supply.
B. changes in all prices.
C. changes in the price of a market basket of consumer goods.
D. changes in the cost of consumer credit.
E. average prices charged in retail stores.
41. Use the following choices regarding the various types of
unemployment to describe this
situation. Tired of the same job, day-in and day-out, Delores
quit her job and is looking for more
challenging work.
A. frictional unemployment
B. structural unemployment
C. natural unemployment

D. cyclical unemployment
42. The unemployment rate is the
A. ratio of unemployed to employed workers.
B. number of employed workers minus the number of workers
who are not in the labor force.
C. percentage of the civilian labor force which is out of work.
D. percentage of the total population which is out of work.
43. The U.S. Department of Labor calculates the unemployment
rate by
A. totaling the number of households receiving unemployment
compensation.
B. analyzing federal income tax returns.
C. surveying households.
D. surveying businesses to determine patterns of hiring and
layoffs.
44. The U.S. Department of Labor may underestimate the
severity of unemployment for all of
the following reasons except
A. discouraged workers are not considered part of the labor
force.
B. many workers are "underemployed," occupying jobs well

below their levels of skills and
education.
C. surveys of household members are likely to produce a rosier
picture of employment
circumstances than actually exists.
D. many households earn far less income than they desire.
E. part-time workers are grouped among the employed, even
though they desire full-time
employment.
45. Suppose there are 8 million unemployed workers seeking
jobs. After a period of time, 2
million of them become discouraged over their job prospects
and cease to look for work. As a
result of this, the official unemployment rate would
A. increase in the short run but eventually decline.
B. increase.
C. decline.
D. be unchanged.
46. Official unemployment statistics

A. understate unemployment because individuals receiving
unemployment compensation are
counted as employed.
B. understate unemployment because "discouraged workers" are
not counted as unemployed.
C. include cyclical and structural unemployment, but not
frictional unemployment.
D. overstate unemployment because workers who are
involuntarily working part time are
counted as being employed.
47. During the period 1983-1989, the U.S. economy was
A. contracting.
B. in a recession.
C. in the trough of the business cycle.
D. expanding.
48. In order for a recession to occur real GDP would have to
fall for at least _____ business
quarter(s).
A. one
B. two

C. three
D. four
E. five
49. Statement I: The CPI and the GDP deflator are similar
concepts, but the GDP deflator is a
broader measure.
Statement II: The CPI and the GDP deflator are inversely
related, so when the CPI rises, the
GDP deflator declines.
50. Statement I: The CPI goes up every year; it can never go
down.
Statement II: In constructing the Consumer Price Index, the
Bureau of Labor Statistics compiles
a market basket of hundreds of goods and services that the
typical urban family buys in the base
year.

Short Answer Questions
1. Given the following information, how many people are in the
labor force? U.S. population,
250 million; employed, 135 million; unemployed, 5 million;
discouraged workers, 4 million;
collecting unemployment insurance, 3 million.
Short Answer Questions continued on next page…..
Short Answer Questions continued
2. Given the following information, compute the unemployment
rate: 6 million unemployed, 124
million employed.
3. If the rate of inflation is 6 percent, the nominal interest rate
is 9%, and the unemployment rate

is 7%, how much is the misery index?
4. Given: 80 million employed; 20 million unemployed; 10
million collecting unemployment
insurance benefits; 10 million discouraged workers. Find: (a)
the number of people in the labor
force; (b) the unemployment rate.
Macroeconomics
Homework Assignment
Chapter 9
1. Net domestic product is usually preferred to GDP by
economists because net national
product
A. includes depreciation.
B. excludes depreciation.

C. includes indirect business taxes.
D. excludes indirect business taxes.
2. If GDP rose from $4 trillion to $6 trillion, and prices rose by
50 percent, over this period
A. real GDP fell by 100 percent.
B. real GDP fell by 50 percent.
C. real GDP stayed the same.
D. real GDP rose by 50 percent.
E. real GDP rose by 100 percent.
3. Which is not counted in GDP?
A. A Social Security check sent to a retiree
B. Government spending on highway building
C. Money spent on an airline ticket
D. Money spent by a company to build a new office park
4. The smallest component of national income is
A. rent.
B. interest.
C. profits.
D. salaries and wages.

5. Which one of the following is counted in GDP?
A. Government spending
B. Transfer payments
C. Intermediate goods
D. Leisure time
A. GDP can never be greater than NDP.
B. NDP can never be greater than GDP.
C. GDP and NDP are always equal.
A. In recent years net exports have been negative.
B. Government spending is the largest sector of GDP.
C. Business investment is the largest sector of GDP.

8. If GDP declined by 6 percent in real terms during one year,
and population declined by 3
percent, then
A. real GDP per capita decreased.
B. real GDP per capita increased.
C. real GDP increased while nominal GDP decreased.
D. nominal GDP did not change at all.
E. prices went down by 3 percent.
9. If our population doubles, our GDP doubles, and the GDP
deflator doubles, our per capita
real GDP will
A. quadruple.
B. double.
C. stay exactly the same.
D. decline by 25 percent.
E. decline by 50 percent.
10. Gross Domestic Product is the total market value of all
A. commodities sold in a year.
B. goods and services produced in a year within a country.

C. foods and services produced by domestic companies in a
year.
D. consumer goods sold in a year.
11. National income measures
A. nominal GDP after it has been inflated or deflated for
changes in the value of the dollar.
B. the inflation adjusted income of resource supplies.
C. the market value or cost of the resources used in the
production of the national output.
D. tax receipts of the federal government.
12. For purposes of calculating GDP using the expenditure
approach, which of the following
is NOT included in the government expenditures account?
A. The government's purchase of pencils
B. The payroll of the federal government
C. The welfare payments made to the poor
D. The government's purchase of a computer
E. None of the choices are correct
13. Intermediate products are
A. goods that are purchased by the government.

B. goods that are transferred to the states.
C. products produced by the federal government but consumed
by the states.
D. products produced by business firms for resale to other firms
for further processing before
sold to the final consumer of the product.
14. GDP is
A. the market value of an economy's production of final goods
and services.
B. the sum of coins, bills, and demand deposits in an economy.
C. the total expenditures of the federal government over the
period of 1 year.
D. the market value of an economy's production of intermediate
goods and services.
E. the total amount the government owes to bondholders.
15. The change in the United States from a rural, self-sufficient
economy to an urban, market-
oriented economy had the effect of
A. causing the growth in GDP to understate the growth in
economic well-being.
B. inhibiting the growth of GDP.

C. causing the growth in GDP to overstate the growth in
D. increasing GDP primarily through the resulting increase in
the general price level.
16. Wages are used to calculate
A. GDP by the income approach.
B. GDP by the expenditures approach.
C. Net exports.
D. Net subsidies to government enterprises.
17. National income accountants can avoid multiple accounting
by
A. including transfers in their calculations.
B. counting both intermediate and final goods.
C. only counting final goods.
D. only counting intermediate goods.
18. The value added for a nation equals
A. all goods and services less the intermediate goods used in
production.
B. the market value of all products and services less the market

value of all intermediate
goods.
C. input costs plus the value of intermediate goods.
D. the market value of intermediate goods less the value of all
goods and services.
19. Suppose that our GDP rose from $20 trillion in the year
2012 to $37 trillion in the year
2013.
A. Real GDP definitely increased.
B. Real GDP definitely decreased.
C. The GDP deflator definitely doubled.
D. The GDP deflator definitely increased.
E. The GDP deflator definitely decreased.
20. The concept of "net domestic investment" refers to
A. the amount of machinery and equipment used up in
producing the GDP in a given year.
B. the difference between the market value and book value of
outstanding capital stock.
C. gross domestic investment less net exports.
D. total investment less the amount of investment goods used up
in accomplishing the year's

production.
E. The total output of capital equipment, construction, and
additions to inventories which
occur in a given year.
21. National income includes all of the following except
A. wages and salaries.
B. corporate profits before taxes.
C. rental income.
D. depreciation.
22. In evaluating an economy's performance over a period of
years, real GDP provides a
better measuring rod than GDP because
A. GDP is distorted by its failure to show qualitative
improvements in the products we
manufacture.
B. Real GDP is adjusted for the social and environmental costs
of production, which are
normally not compensated.
C. Real GDP includes such productive endeavors as housewife

services and home repairs that
are performed by households without payment.
D. Real GDP does not include the value of intermediate goods
and services.
E. GDP reflects changes in prices as well as changes in output,
while real GDP only reflects
changes in output.
23. We use the value added approach in calculating GDP to
A. avoid double counting.
B. account for market price differences.
C. account for changes in population.
D. account for consumer income differences.
24. In 2009, the largest share of the United States economy's
allocation of national product to
land, labor, capital, and management was primarily received by
the suppliers of
A. Management.
B. Land.
C. Labor.
D. Capital.

25. GDP can increase at a faster rate than real GDP
A. only if there is a decline in the price level.
B. only if the unemployment rate is increasing.
C. only if the value of the dollar is stable.
D. only if the population is growing.
E. only if there is inflation.
26. The effect of Hurricane Katrina from a national income
accounting standpoint probably
caused real GDP to
A. decrease.
B. increase.
C. stay the same.
27. The total market value of a nation's aggregate production of
final output based on current
prices for the goods and services produced during a given year
is called
A. net national product.
B. national income.
C. GDP.
D. real GDP.

28. The nation of Upper Volta has a population of 100 million
and a GDP of $4 trillion; the
nation of Lower Volta has a population of 20 million and a GDP
of $600 billion.
A. Upper Volta has a higher per capita GDP than Lower Volta.
B. Lower Volta has a higher per capita GDP than Upper Volta.
C. The per capita GDPs of the two nations are equal.
D. There is not enough information to determine the relative per
capita GDPs of the two
nations.
29. In comparing GDP data over a period of years a difference
between GDP and real GDP
may arise because
A. Of changes in our trade deficits and surpluses.
B. The length of the workweek has declined historically.
C. The price level may change over time.
D. Depreciation may be greater or smaller than gross
investment.
30. Which of the following is part of gross domestic product?

A. Value of homemakers' services in the home.
B. Purchase of a second-hand car from a neighbor.
C. Purchase of new stock from a recognized broker.
D. Purchase of a new textbook in the local bookstore.
E. Purchase of a corporate bond.
31. GDP can be estimated by summing
A. personal consumption expenditures, net private domestic
investment, and federal
government spending.
B. personal consumption expenditures, gross private domestic
investment, government
spending on goods and services, and net exports.
C. all services and goods purchased by households, businesses,
and government.
D. household spending, investment, financial transactions, and
government transfers.
32. The underground economy
A. consists mainly of such involuntary transfer payments as
savings and loan fraud and bank
robberies.
B. consists only of illegal activities such as prostitution, loan-

sharking, and narcotics.
C. is a very stable percentage of GDP.
D. causes GDP to be underestimated by 10 to 15 percent.
E. is a much larger percentage in the United States than in most
other countries.
33. If there is a recession, which of the following will decline?
A. GDP
B. Government purchases
C. Real GDP
D. Nominal income
34. Suppose a farmer sells a bushel of wheat to a miller for $1;
the miller makes it into flour
and sells it to a baker for $2; the baker turns it into bread and
sells it to a customer for $3.
Calculating GDP the contribution of transactions would be
A. $1.00.
B. $2.00.
C. $3.00.
D. $6.00.

35. If families began doing each other's laundry for pay, GDP
would
A. rise.
B. fall.
C. remain unchanged because services are not included in GDP.
D. remain unchanged because laundry is not a final good.
36. The value actually earned by members of households who
supply the inputs necessary to
produce GDP is called
A. net investment.
B. national income.
C. personal income.
D. disposable income.
E. net national product.
37. Suppose that GDP is equal to $8 trillion. If net exports are -
$1 trillion, consumption is $5
trillion, and investment is $2 trillion it follows that
A. government purchases are zero.
B. government purchases are $1 trillion.

C. government purchases are $2 trillion.
D. government purchases are $3 trillion.
38. If a large number of families moved from cities to rural
areas and produced the major
portion of the food what would be the effect on the GDP?
A. GDP would decline
B. GDP would increase
C. GDP would be unaffected
D. GDP would equal NDP
39. Gross investment refers to
A. net investment plus net exports.
B. net investment after it has been "inflated" for changes in the
price level.
C. net investment plus depreciation.
D. private investment plus public investment.
40. Which one of the following is a final good or service?
A. Microcomputer chips for a new computer
B. A radio bought by General Motors for use in its new line of
cars
C. Chemical pesticides used by a farmer to control the incidence

of crop disease
D. A will drawn up by your personal attorney
E. The lead added to gasoline to increase the octane rating
41. Statement I: The higher the GDP deflator, the greater the
degree of deflation.
Statement II: Real GDP was higher in 1992 than in 1991.
B. Both statements are true.
C. Statement II is true and statement I is false.
42. The term "final goods and services" refers to
A. goods and services which are unsold and therefore added to
inventories.
B. goods and services whose value has been adjusted for
changes in the price level.
C. good and services purchased by ultimate users, as opposed to
resale or further processing.
D. the excess of American exports over American imports.
E. consumer goods, as opposed to investment goods.

43. GDP is $7 trillion. If consumption is $4.2 trillion,
investment is $1.4 trillion, and
government purchases are $2.1 trillion, then
A. exports are equal to imports.
B. exports exceed imports by $0.7 trillion.
C. imports exceed exports by $0.7 trillion.
D. exports are equal to $0.7 trillion.
44. The increase in the proportion of women in the labor force
causes GDP to _____ the
growth in economic well-being because ___.
A. overstate; some of the services that women formerly
provided in the home are now
purchased in the market
B. overstate; the services that women provide in the home do
not contribute to economic well-
being
C. understate; some of the services that women formerly
provided in the home are now
purchased in the market
D. understate; the services that women provide in the home do
not contribute to economic

well-being
45. The sale of a used 1999 automobile in 2009 would not be
included in 2009 GDP because
it
A. is a nonmarket transaction.
B. would involve double counting.
C. has already been accounted for.
D. is a noninvestment transaction.
46. Transfer payments are
A. flows of income received by foreigners.
B. flows of income received by exporters.
C. included in GDP.
D. excluded from GDP.
E. stocks of unplanned inventory produced in prior years.
47. Military goods purchased by the government are
A. not included in GDP.
B. measured in GDP by their cost of production.
C. measured in GDP by how much their goods add to the

D. measured in GDP only if the government sells these goods to
another country.
48. Payments for goods and services that will be used up by
households during the year are
A. investment expenditures for the production of output.
B. made by firms to households and called national income.
C. called consumption expenditures.
D. for intermediate goods and are not counted in GDP.
49. Statement I: When there is inflation, real GDP will be
greater than GDP.
Statement II: The greater depreciation is, the greater the
difference between GDP and NDP.
50. Which of the following is an example of an intermediate
product?
A. A pair of skis sold by a sporting goods retailer
B. A share of IBM stock

C. The lumber produced by Boise Cascade and sold to a builder
of new houses
D. An antique car sold to the highest bidder
E. None of the choices are true
Short Answer Questions
1. Find national income.
2. Find net domestic product.
3. Find gross domestic product.
4. Find national income.
5. Find net domestic product.
6. Find gross domestic product.
7. If the GDP deflator rises from 150 to 175, by what
percentage did prices rise?

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