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Circular Flow/GDP/Business Cycles/Unemployment/Inflation Practice TestMultiple ChoiceIdentify the choice that best completes the statement or answers the question.____1.Which of the following is false about the circular-flow diagram?A.Households are the primary demanders of goods and services.B.Firms are the primary suppliers of goods and services.C.Money flows from households to firms as households offer factors of production for sale.D.Money flows in the opposite direction as goods and services and factors of production.E.Household savings is considered an injection of money into the circular flow.____2.In the circular flow model, households:A.receive transfer payments from the government.B.buy resources in the factor markets.C.sell products in the market for goods and services.D.issue stocks and bonds to raise capital.E.pay taxes to the firms in the market for goods and services.____3.Gross domestic product is defined as:A.consumer spending + government purchases + financial spending + exports – imports.B.consumer spending + government transfers + investment spending + exports – imports.C.disposable income + taxes + investment spending + exports + imports.D.consumer spending + government purchases + investment spending + exports – imports.E.consumer spending + government purchases + investment spending + imports– exports.____4.Which one of the following is an example of consumption spending that would be counted toward GDP this year?A.Samantha bought an oven for her cooking show on Food Network.B.Stephanie bought a laptop for her brother.C.Jim purchased 200 shares of Google stock.D.Mr. Smith spent $1500 to buy a used car for his son.E.Eli invested $2000 in a mutual fund through his employer.Consumption Spending$65Rental Income10Interest35Profit20Gross Investment Spending15Wages29Government Purchases18Imports7Exports3Table 10-2: Elistan GDP ($ billions)____5.Use Table 10-2. The GDP for Elistan is:A.$94 billion.B.$188 billion.C.$168 billion.D.$139 billion.E.$108 billion.____6.An example of an intermediate good will be:A.wages paid to an employee.B.steel purchased by the aircraft manufacturers.C.vegetables purchased for your dinner.D.electric bills for the office.E.trucks purchased by the postal service.____7.A country's exports minus its imports during a period are: exports.B.gross exports. imports.D.gross imports.E.direct foreign investment.____8.Which of the following would be classified as consumption?A.a new computer purchased by Federal Express for one of its corporate executives.B.a storage facility built for a moving company.C.a new car purchased by an employee of a company for personal use.D.a dump truck purchased by a demolition company.E.a new photocopier purchased for a small consulting firm.____9.Suppose that Mr. Green Jeans sells $5,000 of wheat to Big Ben Bakery. Big Ben uses the wheat to make flour and then hamburger buns, which they sell to Hamburger Heaven for $11,000. Hamburger Heaven also buys $20,000 of beef from a rancher. Hamburger Heaven uses the beef and buns to make 10,000 hamburgers which are sold for $5 each. How much do these transactions add to GDP?A.$86,000B.$36,000C.$31,000D.$50,000E.$46,000____10.An example of investment spending is:A.the amount of funds raised by the government in the financial markets.B.the purchase of government bonds by a private household.C.the purchase of a freezer by an ice-cream parlor.D.the purchase of stock shares by a mutual fund.E.the payment of dividends to a corporation’s shareholders.____11.GDP tends to understate our economic well being because it:A.includes the value of services produced in the home.B.excludes the value of leisure.C.includes expenditures on crime prevention equipment.D.includes health care costs related to the consumption of cigarettes.E.excludes the value of new construction.____12.In the circular flow diagram, government purchases of goods and services are financed by:A.tax revenues.B.tax revenues net of transfer payments.ernment borrowing from financial markets.D.tax revenues plus government borrowing from financial markets.E.tax revenues net of transfer payments plus government borrowing from financial markets.____13.Construction of new homes is considered part of:A.investment spending.B.consumption.ernment spending.D.private saving.E.the stock market.____14.Transfer payments:A.are a means by which government raises funds.B.represent a redistribution of funds from one individual to another individual in the economy.C.are counted in GDP.D.is another term for government taxation.E.reduce a household’s ability to purchase goods and services.____15.The income approach to calculating a nation’s GDP is to add:A.the value of final products minus the cost of intermediate goods used in the production process.B.wages and salaries earned by the nation’s workforce.C.wages and salaries, interest, rent and profit earned.D.consumption spending, investment, government spending and net exports.E.wages and salaries, and interest payments on government debt.____16.Which of the following accurately describes part of the circular flow diagram?A.Households purchase goods and services from financial markets in exchange for wages, interest, rent and profit.ernment borrows from financial markets while households save in factor markets.C.Firms sell goods and services in exchange for wages, interest, rent and profit.D.Exports represent a flow of money out of the economy and imports represent a flow of money into the economy.E.Firms purchase factors of production from households in exchange for wages, interest, rent and profit.____17.Real GDP is nominal GDP adjusted for:A.double counting.B.changes in prices.C.population.D.imports.E.interest rates.____18.Suppose that nominal GDP is $1000 in 2006 and nominal GDP is $1500 in 2007. If the overall price level ____ between 2006 and 2007, we could say that real GDP _____.A.increased by more than 50%; stayed constant.B.increased by less than 50%; decreased.C.increased by more than 50%; increased.D.increased by 50%; increased.E.increased by 50%; stayed constant.____19.Nominal GDP:A.has not been adjusted for changes in prices over time.B.has been adjusted for changes in prices over time.C.is a small or nominal amount of output.D.excludes the international sector.E.excludes government spending.____20.Per-capita GDP is calculated byA.adjusting GDP for inflation.B.converting domestic GDP into a foreign currency.C.dividing GDP by the price level.D.dividing GDP by the number of employed persons.E.dividing GDP by the population.____21.Employment in the labor force is defined as:A.the total labor force.B.the total population of working age.C.the total number of persons actively working.D.the total number of persons not unemployed.E.the total population of working minus the number of persons unemployed.____22.The labor force is defined as:A.the total persons employed.B.the total population.C.the total of the population of working age.D.the total of the persons employed and unemployed.E.the total of the population of working age minus those voluntarily not seeking to work.____23.The unemployment rate is defined as:A.the percentage of the labor force that is unemployed.B.the number of people unemployed.C.the ratio of the labor force to the number of people unemployed.D.the average length of time someone is unemployed.E.the percentage of the population that is unemployed.____24.To be counted as unemployed, one must:A.have had a job previously.B.be out of work and be actively looking for a job.C.have had a job before and be actively looking for work.D.actively looking for a job and have at least a high-school degree or its equivalentE.be out of work and not a full-time student.____25.You are a college student who is not working or looking for work. You are:A.counted as unemployed.B.counted as a member of the labor force but not employed.C.not counted as part of the labor force.D.counted as employed.E.counted as marginally unemployed.____26.A person who is out of work, would like to work, but has given up looking for work, is often called:A.unemployed.B.employed.C.a discouraged worker.D.a marginally productive worker.E.retired or disabled.____27.A survey reveals that on a small island initially 40 adults have jobs, 10 other adults are looking for jobs, and 30 are neither working nor looking for work. Suppose that 10 of the 30 people who weren't looking for work now begin looking for work. There are now 20 people looking for work and 40 people working. What happens to the unemployment rate?A.It falls to 33.3%.B.It rises to 50.0%.C.It falls to 25.0%.D.It remains the same.E.It rises to 33.3%.Population170Employed95Unemployed and looking for work5Discouraged workers3Retired30Table 12-1: Unemployment and Employment Data____28.Use Table 12-1. According to the accompanying table, the unemployment rate for this economy is:A.2.9%.B.4.8%.C.5.0%.D.5.3%.E.10%.Full-time employed20 millionNot working but looking for work2 millionPart-time employed10 millionDiscouraged workers1 millionTable 12-2: Employment____29.Use Table 12-2. The labor force is:A.33 million.B.32 million.C.31 million.D.22 million.E.30 million.Employed adults200 millionLabor force208 millionUnemployed adults8 millionAdults not in labor force30 millionNon-adults (under 16) population40 millionTable 12-4: Labor Force Distribution____30.Use Table 12-4. The adult labor force participation rate is approximately:A.4%B.13%C.25%D.75%E.87%____31.The official unemployment rate reported by the government may tend to understate the amount of unemployment by:A.including discouraged workers in the calculations.B.excluding discouraged workers who are not actively seeking employment.C.including employed people over 65 in the calculations.D.excluding teenagers from the calculations.E.excluding the full-time students.____32.In general, expansions are characterized by:A.increasing rates of unemployment.B.decreasing rates of unemploymentC.decreasing employment.D.unchanged rates of employment.E.unchanged rates of unemployment.____33.Periods of recession are likely to be marked by:A.increasing rates of unemployment.B.decreasing rates of unemploymentC.increasing employment.D.unchanged rates of employment.E.unchanged rates of unemployment.____34.Anna recently moved to Boston in order for her husband Joe to begin a new job as an economics professor at Harvard. Anna is an experienced surgeon who is currently interviewing with several different hospitals in Boston. Anna is currently:A.seasonally unemployed.B.structurally unemployed.C.cyclically unemployed.D.counted as employed since she is likely to receive a job offer soon.E.frictionally unemployed.____35.People who are in the process of changing jobs are accounted for in the category of:A.frictional unemployment.B.involuntary unemployment.C.structural unemployment.D.cyclical unemployment.E.underemployed.____36.An example of structural unemployment is a(n):A.autoworker who is temporarily laid off from an automobile company due to a decline in sales.B.lifeguard who loses his job at the beach at the end of each summer.C.worker at a fast-food restaurant who quits work and attends college.D.real estate agent who leaves a job in Texas and searches for a similar, higher paying job in California.E.geologist who is permanently laid off from an oil company due to an increase in wages won by labor unions.____37.Sam, who is 55 years old and has been a steel worker for 30 years, is unemployed because the steel plant in his town closed and moved to Mexico. Sam is experiencing:A.cyclical unemployment.B.permanent unemployment.C.frictional unemployment.D.structural unemployment.E.operational unemployment.____38.If the actual unemployment rate is 7% and the cyclical unemployment rate is 2%, then the natural rate of unemployment is:A.2%.B.5%.C.7%.D.9%.E.3.5%____39.An example of cyclical unemployment is a(n):A.ski instructor who stops working at the ski resort in the spring when the snow melts.B.geologist who is permanently laid off from an oil company due to a new technological advance.C.worker at a fast-food restaurant who quits work and attends college.D.real estate agent who leaves a job in Texas and searches for a similar, higher paying job in California.E.autoworker who is laid off from an automobile company due to a decline in sales caused by a recession.____40.The combination of frictional and structural rates of unemployment is called the:A.cyclical rate of unemployment.B.cyclical rate of employment.C.natural rate of unemployment.D.natural rate of employment.E.preventable rate of unemployment.____41.Inflation is when there is:A.a rising aggregate price level.B.an expansion of output.C.a rise in wages.D.a rise in the unemployment rate.E.an increase in national income.____42.Deflation is when there is:A.a decrease in unemployment.B.a decreasing aggregate price level.C.a decline in wages.D.a recession.E.a stock market crash.____43.Which of the following is true?A.Unexpected inflation benefits lenders and hurts borrowers.B.Unexpected inflation benefits lenders but does not affect borrowers.C.Unexpected inflation benefits borrowers but does not affect lenders.D.Unexpected deflation benefits lenders but does not affect borrowers.E.Unexpected inflation benefits borrowers and hurts lenders.____44.Unanticipated inflation:A.increases the value of money.B.decreases uncertainty about the future.C.reduces the value of the debt owed by borrowers.D.helps lenders.E.benefits potential home buyers.____45.Unanticipated inflation:A.helps those on fixed incomes.B.hurts borrowers and helps lenders.C.helps borrowers and hurts lenders.D.causes nominal interest rates to decrease.E.causes people to hold more cash.____46.Suppose that the nominal rate of interest is 7% and the expected inflation rate is 3% then the real rate of interest is equal to:A.3%.B.4%.C.10%.D.7%.E.21%.____47.If the actual inflation rate is less than the expected inflation rate, then:A.there are higher menu costs due to the lower actual inflation.B.the borrowers gain and the lenders lose.C.everyone benefits from the lower actual inflation.D.everyone is worse off from the lower actual inflation.E.the lenders gain and the borrowers lose.____48.Suppose the real interest rate is 2.1% and the nominal interest rate is 5.4%. Then the expected inflation rate is:A.7.5%.B.3.3%.C.–3.3%.D.2.1%.E.5.4%.____49.The nominal interest rate equals:A.the real interest rate times the expected rate of inflation.B.the real interest rate minus the expected rate of inflation.C.the real interest rate plus the expected rate of inflation.D.the real interest rate when inflation is correctly anticipated.E.the real interest rate divided by the expected rate of inflation.____50.Unanticipated inflation:A.reduces the value of money.B.increases the value of current wages.C.increases certainty about the future.D.helps lenders.E.harms borrowers.____51.You have gone to the bank to borrow money for one year. The nominal rate is 7.5%. The real rate of interest is 4%. Over the course of the year, overall prices increased by 4%. This rate of inflation hurt _____ because the actual rate of inflation was _____ than the anticipated rate of inflation.A.the borrower; lowerB.the borrower; higherC.the lender; higherD.the lender; lowerE.neither the borrower nor the lender; equal to____52.In periods of unexpected inflation:A.borrowers benefit since they repay their loans in dollars with lower real value.B.lenders benefit since they are repaid in dollars with a higher real value.C.neither borrowers nor lenders are affected by the inflation rate since their nominal interest rate stays the same.D.lenders benefit since the nominal interest rate does not change.E.borrowers are hurt since they repay their loans in dollars with higher real value.____53.The ______ is the most widely used measure of inflation in the United States.A.producer price indexB.consumer price indexC.GDP deflatorD.national income accountE.growth rate of real GDP____54.Inflation can be measured by:A.the percentage change in the CPI.B.the absolute change in the CPI.C.the absolute change in the GDP deflator.D.the percentage change in nominal GDP.E.the percentage change in real GDP. GO TO THE NEXT PAGE FOR ADDITIONAL PROBLEMS55. Which form of inflation is caused by excessive AD?56. Which form of inflation is caused by oil prices going up rapidly? What is the common name for This type of inflation?57. What is the Quantity Theory of Inflation? What formula is used for the Quantity Theory?58. If the Money Supply = 10, Velocity = 4, Prices or Inflation = 2, what is Quantity or Real GDP?59. If Nominal GDP, rises from $10 trillion in 2004 (the base year) to $15 trillion in 2010. The Price Index (aka GDP Deflator) in 2010 is 120. a) Find Real GDP in 2010:b) Calculate the percentage increase in Real GDP between 2004 and 2010. 59. What are the three leakages from Circular Flow and their corresponding injections?GO TO THE NEXT PAGE FOR A CPI CALCULATION QUESTION60. For the following data, calculate the following:The CPI for year 1The CPI for year 2The percentage change in CPI from year 1 to year 2. (show your work). Quantity BoughtUnit Price Unit PriceUnit PriceProduct In the Base Year In Base Yr In Year 1 In Year 2Spam 30 $ 5.00$ 7.00$ 9.00PMP 40 6.00 5.00 4.00Vienna 60 1.50 2.00 2.50Sausages* PMP is the dreaded Potted Meat ProductCPI for year 1CPI for year 2Percentage change in CPI from year 1 to year 2:Circular Flow/GDP/Business Cycles/Unemployment/Inflation Practice TestAnswer SectionMULTIPLE CHOICE1.ANS:CPTS:1DIF:MREF:Module 10MSC:Fact-Based2.ANS:APTS:1DIF:MREF:Module 10MSC:Fact-Based3.ANS:DPTS:1DIF:EREF:Module 10MSC:Definitional4.ANS:BPTS:1DIF:MREF:Module 10MSC:Concept-Based5.ANS:APTS:1DIF:MREF:Module 10MSC:Critical Thinking6.ANS:BPTS:1DIF:MREF:Module 10MSC:Critical Thinking7.ANS:APTS:1DIF:EREF:Module 10MSC:Definitional8.ANS:CPTS:1DIF:MREF:Module 10MSC:Concept-Based9.ANS:DPTS:1DIF:DREF:Module 10MSC:Critical Thinking10.ANS:CPTS:1DIF:MREF:Module 10MSC:Concept-Based11.ANS:BPTS:1DIF:MREF:Module 10MSC:Fact-Based12.ANS:EPTS:1DIF:MREF:Module 10MSC:Fact-Based13.ANS:APTS:1DIF:MREF:Module 10MSC:Concept-Based14.ANS:BPTS:1DIF:MREF:Module 10MSC:Concept-Based15.ANS:CPTS:1DIF:EREF:Module 10MSC:Definitional16.ANS:EPTS:1DIF:MREF:Module 10MSC:Concept-Based17.ANS:BPTS:1DIF:EREF:Module 11MSC:Definitional18.ANS:EPTS:1DIF:MREF:Module 11MSC:Analytical Thinking19.ANS:APTS:1DIF:MREF:Module 11MSC:Definitional20.ANS:EPTS:1DIF:EREF:Module 11MSC:Definitional21.ANS:CPTS:1DIF:EREF:Module 12MSC:Definitional22.ANS:DPTS:1DIF:MREF:Module 12MSC:Definitional23.ANS:APTS:1DIF:MREF:Module 12MSC:Definitional24.ANS:BPTS:1DIF:EREF:Module 12MSC:Definitional25.ANS:CPTS:1DIF:EREF:Module 12MSC:Concept-Based26.ANS:CPTS:1DIF:EREF:Module 12MSC:Definitional27.ANS:EPTS:1DIF:DREF:Module 12MSC:Analytical Thinking28.ANS:CPTS:1DIF:MREF:Module 12MSC:Critical Thinking29.ANS:BPTS:1DIF:EREF:Module 12MSC:Critical Thinking30.ANS:EPTS:1DIF:DREF:Module 12MSC:Analytical Thinking31.ANS:BPTS:1DIF:MREF:Module 12MSC:Fact-Based32.ANS:BPTS:1DIF:EREF:Module 12MSC:Concept-Based33.ANS:APTS:1DIF:EREF:Module 12MSC:Concept-Based34.ANS:EPTS:1DIF:MREF:Module 13MSC:Critical Thinking35.ANS:APTS:1DIF:EREF:Module 13MSC:Definitional36.ANS:EPTS:1DIF:MREF:Module 13MSC:Critical Thinking37.ANS:DPTS:1DIF:MREF:Module 13MSC:Critical Thinking38.ANS:BPTS:1DIF:MREF:Module 13MSC:Concept-Based39.ANS:EPTS:1DIF:MREF:Module 13MSC:Critical Thinking40.ANS:CPTS:1DIF:MREF:Module 13MSC:Definitional41.ANS:APTS:1DIF:EREF:Module 14MSC:Definitional42.ANS:BPTS:1DIF:EREF:Module 14MSC:Definitional43.ANS:EPTS:1DIF:MREF:Module 14MSC:Concept-Based44.ANS:CPTS:1DIF:MREF:Module 14MSC:Concept-Based45.ANS:CPTS:1DIF:MREF:Module 14MSC:Concept-Based46.ANS:BPTS:1DIF:MREF:Module 14MSC:Critical Thinking47.ANS:EPTS:1DIF:MREF:Module 14MSC:Critical Thinking48.ANS:BPTS:1DIF:MREF:Module 14MSC:Concept-Based49.ANS:CPTS:1DIF:MREF:Module 14MSC:Definitional50.ANS:APTS:1DIF:MREF:Module 14MSC:Concept-Based51.ANS:CPTS:1DIF:MREF:Module 14MSC:Critical Thinking52.ANS:APTS:1DIF:MREF:Module 14MSC:Critical Thinking53.ANS:BPTS:1DIF:EREF:Module 15MSC:Fact-Based54.ANS:APTS:1DIF:MREF:Module 15MSC:Definitional ................
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