Macroeconomics, 7e (Abel/Bernanke/Croushore)

Chapter 1 Introduction to Macroeconomics

1.1 What Macroeconomics Is About
1) The two major reasons for the tremendous growth in output in the U.S. economy oer the !ast
1"# years are
A) popu!ation growth and !ow inf!ation.
$) popu!ation growth and increased productiity.
%) !ow unemp!oyment and !ow inf!ation.
&) !ow inf!ation and !ow trade deficits.
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") The main reason that the United States has such a high standard of !iing is
A) !ow unemp!oyment.
$) high aerage !abor productiity.
%) !ow inf!ation.
&) high goernment budget deficits.
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+) Aerage !abor productiity is the
A) amount of wor,ers per machine.
$) amount of machines per wor,er.
%) ratio of emp!oyed to unemp!oyed wor,ers.
&) amount of output per wor,er.
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-) In ana!y.ing macroeconomic data during the past year/ you hae discoered that aerage !abor
productiity fe!!/ but tota! output increased. What was most !i,e!y to hae caused this0
A) There is nothing unusua! in this outcome because this is what norma!!y occurs.
$) The capita!1output ratio probab!y rose.
%) There was an increase in !abor input.
&) Unemp!oyment probab!y increased.
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#) In which of the fo!!owing periods did aerage !abor productiity in the United States grow the
fastest0
A) 14"4 to 14+#
$) 14-4 to 145+
%) 145+ to 144#
&) 144# to "336
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8) The most direct effect of an increase in the growth rate of aerage !abor productiity wou!d be
an increase in
A) the inf!ation rate.
$) the unemp!oyment rate.
%) the !ong9run economic growth rate.
&) imported goods.
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5) Short9run contractions and e:pansions in economic actiity are ca!!ed
A) recessions.
$) e:pansions.
%) deficits.
&) the business cyc!e.
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6) When nationa! output rises/ the economy is said to be in
A) an e:pansion.
$) a def!ation.
%) an inf!ation.
&) a recession.
Answer' A
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4) Which of the fo!!owing best describes a typica! business cyc!e0
A) *conomic e:pansions are fo!!owed by economic contractions.
$) Inf!ation is fo!!owed by unemp!oyment.
%) Trade surp!uses are fo!!owed by trade deficits.
&) Stagf!ation is fo!!owed by inf!ationary economic growth.
Answer' A
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13) &uring recessions/ the unemp!oyment rate ;;;;;;;; and output ;;;;;;;;.
A) rises< fa!!s
$) rises< rises
%) fa!!s< rises
&) fa!!s< fa!!s
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11) The number of unemp!oyed diided by the !abor force e=ua!s
A) the inf!ation rate.
$) the !abor force participation rate.
%) the unemp!oyment rate.
&) the misery inde:.
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1") The unemp!oyment rate is the
A) number of unemp!oyed diided by the number of emp!oyed.
$) number of emp!oyed diided by the number of unemp!oyed.
%) number of unemp!oyed diided by the !abor force.
&) !abor force diided by the number of unemp!oyed.
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1+) The highest and most pro!onged period of unemp!oyment in the United States oer the !ast
1"# years occurred during
A) Wor!d War II.
$) the 1643s &epression.
%) the 144391441 recession.
&) the >reat &epression of the 14+3s.
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1-) &uring the >reat &epression/ the unemp!oyment rate for the United States pea,ed at
appro:imate!y
A) 13?.
$) 53?.
%) -#?.
&) "#?.
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1#) A country is said to be e:periencing inf!ation when
A) prices of most goods and serices are rising oer time.
$) prices of most goods and serices are fa!!ing oer time.
%) tota! output is rising oer time.
&) tota! output is fa!!ing oer time.
Answer' A
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18) @rom 1633 to 14-3/ the price !ee! in the United States
A) trended neither upward nor downward.
$) f!uctuated wi!d!y.
%) dec!ined s!ow!y.
&) increased s!ow!y.
Answer' A
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15) $efore Wor!d War II/ the aerage !ee! of prices in the United States usua!!y
A) fe!! during wartime and rose during peacetime.
$) fe!! during wartime and fe!! during peacetime.
%) rose during wartime and fe!! during peacetime.
&) rose during wartime and rose during peacetime.
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16) A country is said to be e:periencing def!ation when
A) prices of most goods and serices are rising oer time.
$) prices of most goods and serices are fa!!ing oer time.
%) tota! output is rising oer time.
&) tota! output is fa!!ing oer time.
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14) The inf!ation rate is the
A) percent increase in the aerage !ee! of prices oer a year.
$) percent increase in output oer a year.
%) percent increase in the unemp!oyment rate oer a year.
&) price !ee! diided by the !ee! of output.
Answer' A
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"3) If the price !ee! was 133 in "334 and 13" in "313/ the inf!ation rate was
A) 13"?.
$) "3?.
%) "?.
&) 3."?.
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"1) A c!osed economy is a nationa! economy that
A) doesnAt interact economica!!y with the rest of the wor!d.
$) has a stoc, mar,et that is not open to traders from outside the country.
%) has e:tensie trading and financia! re!ationships with other nationa! economies.
&) has not estab!ished dip!omatic re!ations with other nationa! economies.
Answer' A
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"") An open economy is a nationa! economy that
A) doesnAt interact economica!!y with the rest of the wor!d.
$) has a stoc, mar,et that is open to traders from anywhere in the wor!d.
%) has e:tensie trading and financia! re!ationships with other nationa! economies.
&) has estab!ished dip!omatic re!ations with most other nationa! economies.
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"+) An economy that doesnAt interact economica!!y with the rest of the wor!d is ca!!ed ;;;;;;;;
economy.
A) a c!osed
$) an open
%) a surp!us
&) an authoritarian
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"-) U.S. imports are goods and serices
A) produced abroad and so!d to Americans.
$) produced in the United States and so!d to Americans.
%) produced abroad and so!d to foreigners.
&) produced in the United States and so!d to foreigners.
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"#) @o!!owing Wor!d War I and Wor!d War II/ the United States had a
A) sma!! trade surp!us.
$) sma!! trade deficit.
%) !arge trade deficit.
&) !arge trade surp!us.
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"8) In the 1463s/ 1443s/ and "333s/ the United States has had a
A) sma!! trade surp!us.
$) sma!! trade deficit.
%) !arge trade deficit.
&) !arge trade surp!us.
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"5) A country has a trade surp!us when
A) imports e:ceed e:ports.
$) imports e=ua! e:ports.
%) e:ports e:ceed imports.
&) imports e=ua! .ero.
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"6) A country has a trade deficit when
A) imports e:ceed e:ports.
$) imports e=ua! e:ports.
%) e:ports e:ceed imports.
&) e:ports are .ero.
Answer' A
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"4) &ata on e:ports and imports for the United States oer the period from 1643 to "336 show
that
A) the United States had !arge trade deficits throughout this entire period.
$) the United States had !arge trade surp!uses throughout this entire period.
%) the percentage of tota! output e:ported by U.S. firms fe!! dramatica!!y during Wor!d War I and
Wor!d War II.
&) a higher percentage of U.S. goods was e:ported in recent years than in ear!ier years.
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+3) A centra! ban, is an institution that
A) pays for goernment e:penditures.
$) contro!s a nationAs monetary po!icy.
%) runs a countryAs stoc, mar,et.
&) determines a nationAs fisca! po!icy.
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+1) In the United States/ monetary po!icy is determined by
A) the @edera! 7esere.
$) the president.
%) priate citi.ens.
&) the Treasury &epartment.
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+") The pea, in U.S. goernment spending as a percent of >&) occurred during
A) Wor!d War II.
$) the 1483s war on poerty.
%) the >reat &epression.
&) the war against Ira= in the "333s.
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++) Why were the U.S. goernment budget deficits of the 1463s and ear!y 1443s so unusua! from
a historica! point of iew0
A) It was the first time the U.S. goernment had eer run deficits.
$) In the past/ deficits were usua!!y that !arge on!y in wartime.
%) It was the first time that deficits were accompanied by ery high rates of inf!ation.
&) It was the first time that deficits dierted funds from other productie uses/ such as
inestment in modern e=uipment.
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+-) %ritics of the goernmentAs fisca! po!icies argued that goernment deficits
A) preented capita! from f!owing into the United States.
$) were !in,ed to the e:cess of imports oer e:ports that occurred in the 1463s.
%) caused the !ee! of unemp!oyment in the United States to increase during the 1463s.
&) had direct!y contributed to a dec!ine in the !ee! of demand in the American economy.
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+#) The difference between microeconomics and macroeconomics is that
A) microeconomics !oo,s at supp!y and demand for goods/ macroeconomics !oo,s at supp!y and
demand for serices.
$) microeconomics !oo,s at prices/ macroeconomics !oo,s at inf!ation.
%) microeconomics !oo,s at indiidua! consumers/ macroeconomics !oo,s at nationa! tota!s.
&) microeconomics !oo,s at nationa! issues/ macroeconomics !oo,s at g!oba! issues.
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+8) Aggregation is the process of
A) ca!cu!ating rea! >&) based on nomina! >&) and the price inde:.
$) summing indiidua! economic ariab!es to obtain economy9wide tota!s.
%) forecasting the components of >&).
&) predicting when recessions wi!! occur.
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+5) What are the major factors affecting the !ong9term growth of the economyAs output0
Answer' The major factors are popu!ation growth and aerage !abor productiity.
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+6) Macroeconomic information for the economy of Anchoy is gien be!ow.
Ba) What was the growth rate of aerage !abor productiity in Anchoy between Cear 1 and Cear
"0
Bb) What was the inf!ation rate in Anchoy between Cear 1 and Cear "0
Bc) What was the unemp!oyment rate in Cear 10 In Cear "0
Answer'
Ba) Aerage !abor productiity' Cear 1' 63331533 D 6315< Cear "' 43331633 D 4316< growth rate D
EB4316)1B6315)F 9 1 D 93.318 D 93.18?
Bb) Inf!ation rate' B416) 9 1 D 3.1"# D 1".#?
Bc) Unemp!oyment rates' Cear 1' 531553 D 3.341 D 4.1?< Cear "' 1331433 D 3.111 D 11.1?
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+4) Using the %)I measure of the price !ee!/ which is 133 in the base year of "335/ ca!cu!ate the
annua! inf!ation rates for
Ba) "336/ when the inde: is 13+.5.
Bb) "334/ when the inde: is 13#.#.
Bc) "313/ when the inde: is 135.5.
Answer'
Ba) Inf!ation in "336 D B13+.5 9 133)1133 G 133? D +.5?.
Bb) Inf!ation in "334 D B13#.# 9 13+.5)1133 G 133? D 1.5?.
Bc) Inf!ation in "313 D B135.5 9 13#.#)1133 G 133? D ".1?.
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-3) What is meant by aggregation0 Why is aggregation important for macroeconomic ana!ysis0
Answer' Aggregation refers to the process of adding together indiidua! economic ariab!es to
obtain economy wide tota!s. Aggregation distinguishes microeconomics from macroeconomics.
It a!!ows us to study the economy as a who!e/ rather than !oo,ing at its indiidua! parts.
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1." What Macroeconomists &o
1) A country that has many we!!9trained macroeconomic ana!ysts wi!! not necessari!y hae more
beneficia! macroeconomic po!icies because
A) economistsA understanding of the economy remains poor.
$) there are few ways in which economistsA comp!e: mode!s can be app!ied to the rea! wor!d.
%) economists agree on so few goernment po!icies.
&) economic po!icy is usua!!y made by po!iticians/ not economists.
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") The main goa! of macroeconomic research is to
A) predict how the macroeconomy wi!! perform in the future.
$) ana!y.e current macroeconomic data.
%) dee!op new data that can be used to understand better the operation of the economy.
&) ma,e genera! statements about how the economy wor,s.
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+) A set of ideas about the economy that hae been organi.ed in a !ogica! framewor, is ca!!ed
A) empirica! ana!ysis.
$) a methodo!ogy.
%) economic theory.
&) data dee!opment.
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-) Assumptions for economic theories and mode!s shou!d be
A) rejected if they are not tota!!y rea!istic.
$) !ogica! rather than empirica!!y testab!e.
%) simp!e and reasonab!e rather than comp!e:.
&) maintained unti! oerwhe!ming eidence to the contrary occurs.
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#) If the theory behind an economic mode! fits the data poor!y/ you wou!d probab!y want to
A) use the theory to predict what wou!d happen if the economic setting or economic po!icies
change.
$) start from scratch with a new mode!.
%) enrich the mode! with additiona! assumptions.
&) restate the research =uestion.
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8) Match each of the fo!!owing jobs to its major area' forecasting/ ana!ysis/ research/ or data
dee!opment. *:p!ain your answers.
Ba) *conomist at uniersity/ testing theories about the efficient a!!ocation of resources in the
foreign e:change mar,et
Bb) *conomist at Wa!! Street firm trying to predict the rate of inf!ation ne:t year using past data
Bc) *conomist at auto firm !oo,ing at demand for new automobi!es
Bd) *conomist at the Internationa! Trade %ommission trying to determine whether foreign firms
are dumping goods in the United States
Be) *conomist at the %ommerce &epartment dee!oping new methods for ca!cu!ating price
inde:es
Bf) *conomist consu!ting in *astern *urope about how to set up free9mar,et financia! systems.
Answer'
Ba) 7esearch
Bb) @orecasting
Bc) Ana!ysis
Bd) Ana!ysis
Be) &ata dee!opment
Bf) Ana!ysis
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1.+ Why Macroeconomists &isagree
1) )ositie ana!ysis of economic po!icy
A) e:amines the economic conse=uences of po!icies but does not address the =uestion of whether
those conse=uences are desirab!e.
$) e:amines the economic conse=uences of po!icies and addresses the =uestion of whether those
conse=uences are desirab!e.
%) generates !ess agreement among economists than normatie ana!ysis.
&) is rare in =uestions of economic po!icy.
Answer' A
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") *=ui!ibrium in the economy means
A) unemp!oyment is .ero.
$) =uantities demanded and supp!ied are e=ua! in a!! mar,ets.
%) prices are not changing oer time.
&) ta: reenues e=ua! goernment spending/ so the goernment has no budget deficit.
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+) Adam SmithAs idea of the Hinisib!e handH says that gien a countryAs resources and its initia!
distribution of wea!th/ the use of mar,ets wi!!
A) insu!ate a nation from the effects of po!itica! instabi!ity.
$) e!iminate prob!ems of hunger and dissatisfaction.
%) e!iminate ine=ua!ities between the rich and the poor.
&) ma,e peop!e as economica!!y we!! off as possib!e.
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-) The two most comprehensie/ wide!y accepted macroeconomic mode!s are
A) the c!assica! mode! and the supp!y9side mode!.
$) the supp!y9side mode! and the rea! business cyc!e mode!.
%) the c!assica! mode! and the Ieynesian mode!.
&) the Austrian mode! and the Ieynesian mode!.
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#) %!assica! economists argue that
A) the goernment shou!d hae an actie ro!e in the economy.
$) goernment po!icies wi!! be ineffectie and counterproductie.
%) the goernment shou!d actie!y interene in the economy to e!iminate business cyc!es.
&) wages and prices donAt adjust =uic,!y/ so the economy is s!ow to return to e=ui!ibrium.
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8) Ieynes was motiated to create a macroeconomic theory different from c!assica! theory
because
A) he be!ieed in goernment interention in the economy.
$) he be!ieed in the idea of the inisib!e hand.
%) monetary po!icy was more important than the c!assica!s ac,now!edged.
&) c!assica! theory was inconsistent with the data in the >reat &epression.
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5) Ieynes assumed that wages and prices were s!ow to adjust in order to e:p!ain
A) persistent!y high unemp!oyment.
$) high inf!ation.
%) the high !ee! of interest rates.
&) why inf!ation fe!! in recessions.
Answer' A
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6) Jow did Ieynes propose to so!e the prob!em of high unemp!oyment0
A) Increase the growth rate of the money supp!y.
$) A!!ow wages to dec!ine/ so that firms wi!! want to hire more wor,ers.
%) )ut on wage and price contro!s/ so wages wonAt rise and firms wonAt hae to !ay peop!e off to
cut costs.
&) Jae the goernment increase its demand for goods and serices.
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4) The primary factor that caused most economists to !ose their faith in the c!assica! approach to
macroeconomic po!icy was
A) the high !ee!s of unemp!oyment that occurred during the >reat &epression.
$) the presence of both high unemp!oyment and high inf!ation during the 1453s.
%) the theoretica! proof that c!assica! ideas were ina!id.
&) the eidence that c!assica! ideas were usefu! during economic booms/ but not during
economic recessions.
Answer' A
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13) The primary factor that caused some economists to !ose their faith in the Ieynesian approach
to macroeconomic po!icy was
A) the high !ee!s of unemp!oyment that occurred during the >reat &epression.
$) the presence of both high unemp!oyment and high inf!ation during the 1453s.
%) theoretica! proof that IeynesAs ideas were ina!id.
&) eidence that IeynesAs ideas were usefu! during economic recessions/ but not during
economic booms.
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11) Why is wage and price f!e:ibi!ity crucia! to the idea of the Hinisib!e hand0H
Answer' Wage and price f!e:ibi!ity is crucia! because in a free9mar,et system/ changes in wages
and prices are the signa!s that coordinate the actions of peop!e and businesses in the economy.
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1") %ompare and contrast the c!assica! and Ieynesian schoo!s of thought for the fo!!owing
economic issues.
Ba) The f!e:ibi!ity of wages and prices.
Bb) The importance of macroeconomic po!icies.
Answer'
Ba) The f!e:ibi!ity of wages and prices is a principa! point of disagreement between c!assica!
economists and Ieynesians. %!assica! economists be!iee that wages and prices are =uite
f!e:ib!e< in response to a change in mar,et conditions/ wages and prices adjust =uic,!y to their
new mar,et9c!earing !ee!s. Ieynesians be!iee that wages and prices are rigid or stic,y< in
response to changes in the economy/ wages and prices adjust s!ow!y to their new mar,et9c!earing
!ee!s.
Bb) %!assica!s and Ieynesians a!so disagree about the use of macroeconomic po!icies. >ien
wage9price f!e:ibi!ity/ c!assica! economists be!iee that the mar,et economy norma!!y proides
for fu!! emp!oyment. They be!iee that goernment interention in the form of macroeconomic
fisca! and monetary po!icies is not needed to preent recessions. >ien s!ow adjustments in
wages and prices/ Ieynesians be!iee that recessions cou!d p!ague the economy for seera!
years. They be!iee that efficient use of macroeconomic po!icies cou!d return the economy to
e=ui!ibrium more =uic,!y.
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1+) In 144+/ the debate heated up in the United States about the Korth American @ree Trade
Agreement BKA@TA)/ which proposed to reduce barriers to trade Bsuch as ta:es on or !imits to
imports) among %anada/ the United States/ and Me:ico. Some peop!e opposed strong!y the
agreement/ arguing that an inf!u: of foreign goods under KA@TA wou!d disrupt the U.S.
economy/ harm domestic industries/ and throw American wor,ers out of wor,. Jow might a
c!assica! economist respond to these concerns0 Wou!d you e:pect a Ieynesian economist to be
more or !ess sympathetic to these concerns than the c!assica! economist0 Why0
Answer' A c!assica! economist might argue that the economy wou!d wor, more efficient!y with
KA@TA because it reduces trade barriers/ ma,ing the inisib!e hand wor, een better. Wor,ers
cou!d specia!i.e een more than before so that tota! output produced by a!! three countries wou!d
be more. Though the industria! mi: might change in each country/ wages and prices across
industries wou!d adjust =uic,!y/ and peop!e in industries that c!osed down in a particu!ar country
wou!d =uic,!y find new jobs.
A Ieynesian economist might be more sympathetic to concerns about KA@TA because of the
be!ief that adjustment to the changes wi!! not occur =uic,!y. As a resu!t/ peop!e in particu!ar
industries in a country may become unemp!oyed. Wages wonAt adjust =uic,!y to restore fu!!
emp!oyment/ so some goernment action B!i,e retraining programs to gie disp!aced wor,ers
new s,i!!s) may be desirab!e.
&iff' "
Topic' Section' 1.+
(uestion Status' )reious *dition
18
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