Chapter 17

1. Chapter 17 Macroeconomics: The Big Picture

2. Question • Which of the following is not a macroeconomic topic? • The current unemployment rates in Europe • The rising costs in the US health-care industry • Unemployment during the Great Depression • US inflation rates during a recession • Economic growth of countries in Latin America

3. Answer • Which of the following is not a macroeconomic topic? • The current unemployment rates in Europe • The rising costs in the US health-care industry (Correct) • Unemployment during the Great Depression • US inflation rates during a recession • Economic growth of countries in Latin America

4. Question • Which of the following is the best measure of how individuals benefit from economic growth? • The rate of increase in GDP per capita • The rate of increase in GDP • The rate of increase in real GDPper capita • The rate of inflation • The rate of increase in real GDP

5. Answer • Which of the following is the best measure of how individuals benefit from economic growth? • The rate of increase in GDP per capita • The rate of increase in GDP • The rate of increase in real GDPper capita (Correct) • The rate of inflation • The rate of increase in real GDP

6. Question • A recession is • a fall in real GDP lasting at least one month. • a fall in real GDP lasting at least sixmonths. • said to occur whenever real GDP fallsbelow the long-term trend. • said to occur whenever real GDP falls below the long-term trend for at least one month. • a fall in real GDP lasting at least one year.

7. Answer • A recession is • a fall in real GDP lasting at least one month. • a fall in real GDP lasting at least sixmonths. (Correct) • said to occur whenever real GDP fallsbelow the long-term trend. • said to occur whenever real GDP falls below the long-term trend for at least one month. • a fall in real GDP lasting at least one year.

8. Question • When a recession ends , the economy usually experiences • immediate growth and prosperity. • a depression. • a period of recovery back to itspre-recession state. • rising inflation and unemployment rates. • no ill effects from the recession.

9. Answer • When a recession ends , the economy usually experiences • immediate growth and prosperity. • a depression. • a period of recovery back to itspre-recession state. (Correct) • rising inflation and unemployment rates. • no ill effects from the recession.

10. Question • The unemployment rate • has increased steadily over the last 30 years. • is never equal to zero. • is zero if the economy is in an expansion. • increases as real GDP increases. • is zero unless the economy is in a recession.

11. Answer • The unemployment rate • has increased steadily over the last 30 years. • is never equal to zero. (Correct) • is zero if the economy is in an expansion. • increases as real GDP increases. • is zero unless the economy is in a recession.

12. Question • The two branches of macroeconomic theory are • inflation and growth theory. • inflation and economic fluctuations theory. • economic fluctuations and unemployment theory. • inflation and unemployment theory. • economic fluctuations and economicgrowth theory.

13. Answer • The two branches of macroeconomic theory are • inflation and growth theory. • inflation and economic fluctuations theory. • economic fluctuations and unemployment theory. • inflation and unemployment theory. • economic fluctuations and economicgrowth theory. (Correct)

14. Question • The three determinants of the supply of real GDP are • labor, capital, and money. • labor, capital, and households. • labor, capital, and technology. • labor, capital, and markets. • labor, capital, and government.

15. Answer • The three determinants of the supply of real GDP are • labor, capital, and money. • labor, capital, and households. • labor, capital, and technology. (Correct) • labor, capital, and markets. • labor, capital, and government.

16. Question • Which of the following best explains how fiscal policy affects economic growth? • By controlling strategic industries • By developing new government agencies • By funding higher education • By providing unemployment compensation • By affecting incentives to invest, work, hire workers, and develop new technologies

17. Answer • Which of the following best explains how fiscal policy affects economic growth? • By controlling strategic industries • By developing new government agencies • By funding higher education • By providing unemployment compensation • By affecting incentives to invest, work, hire workers, and develop new technologies (Correct)

18. Question • Monetary policy • affects long-term economic growth bykeeping interest rates high. • affects long-term economic growth bykeeping interest rates low. • affects long-term economic growth bykeeping inflation rates low and stable. • has no effect on long-term economic growth. • affects long-term economic growth bykeeping the US national debt low.

19. Answer • Monetary policy • affects long-term economic growth bykeeping interest rates high. • affects long-term economic growth bykeeping interest rates low. • affects long-term economic growth bykeeping inflation rates low and stable. (Correct) • has no effect on long-term economic growth. • affects long-term economic growth bykeeping the US national debt low.

20. Question • According to the theory of economic fluctuations, which of the following explains the relationship between aggregate demand and employment during a recession? • A fall in output causes potential GDP to increase, causing employment to decline. • A fall in real GDP causes aggregate demand to fall. As a result, firms lay off workers. • A fall in aggregate demand causes real GDP to fall as firms adjust their production. Workers are laid off as a result. • A fall in aggregate demand causes potential GDP to fall. The resulting decline in output causes employment to fall. • Workers decide they would rather have more leisure time and decide not to work as much. As a result there is less labor employed and less is produced.

21. Answer • According to the theory of economic fluctuations, which of the following explains the relationship between aggregate demand and employment during a recession? • A fall in output causes potential GDP to increase, causing employment to decline. • A fall in real GDP causes aggregate demand to fall. As a result, firms lay off workers. • A fall in aggregate demand causes real GDP to fall as firms adjust their production. Workers are laid off as a result. (Correct) • A fall in aggregate demand causes potential GDP to fall. The resulting decline in output causes employment to fall. • Workers decide they would rather have more leisure time and decide not to work as much. As a result there is less labor employed and less is produced.

22. Question • If the economy is heading towards a recession, the Federal Reserve is likely to • raise interest rates in order to increaseaggregate demand. • raise interest rates in order to reduceaggregate demand. • lower interest rates in order to increase aggregate demand. • lower interest rates in order to reduceaggregate demand. • do nothing because it is not clear what effect interest rates have on aggregate demand.

23. Answer • If the economy is heading towards a recession, the Federal Reserve is likely to • raise interest rates in order to increaseaggregate demand. • raise interest rates in order to reduceaggregate demand. • lower interest rates in order to increase aggregate demand. (Correct) • lower interest rates in order to reduceaggregate demand. • do nothing because it is not clear what effect interest rates have on aggregate demand.