Question

1) In the short run, a price decrease combined with an increase in the unemployment rate is most likely to be the result of A) an adverse supply shock B) a favorable supply shock C) a decrease in money supply D) an expansionary fiscal or monetary policy

2) Potential GDP is the value of GDP that can be calculated if we assume that A) the unemployment rate is zero B) the inflation rate is zero C) GDP has been adjusted for inflation D) the capital stock is working at full capacity and we have full employment

3) Which of the following is NOT a source of increased factor productivity? A) advances in knowledge B) growth in the size of the labor force C) more efficient resource allocation D) technological progress

4) Okun's law states that one extra percentage point in unemployment causes A) a 2 percent fall in GDP B) a 0.5 percent fall in GDP C) a 2 percent fall in the rate of inflation D) a 0.5 percent fall in the rate of inflation

5) If output is at its full-employment level, then A) the actual unemployment rate is zero B) the natural rate of unemployment is zero C) there are no frictions in the labor market since wages have reached their market-clearing level D) there is still some positive level of unemployment due to frictions in the labor market

6) The income velocity of money can be calculated using the following formula A) V = M/(PY) B) V = (MY)/P C) V = (PY)/M D) V = MY

7) Assume that the prices of cars manufactured in the U.S. increase due to an increase in quality. Which of the following will happen if the same number of cars is sold? A) real GDP should increase B) nominal GDP should increase C) the GDP-deflator should decrease D) real GDP and the GDP-deflator should increase

8) An endogenous growth model predicts that if the rates of population growth increases, then the growth rate of GDP per capita will A) increase B) decrease C) stay the same D) temporarily increase, but then go back to its original level

9) Given the Keynesian AS-curve, expansionary monetary policy will A) increase the level of output but leave the price level unchanged B) increase the price level but leave the level of output unchanged C) increase both the level of output and the price level D) leave the level of output and the price level unchanged

10) The relationship between the output produced in an economy, the input of factors of production, and the state of technological knowledge is called the A) aggregate supply function B) aggregate production function C) aggregate investment function D) marginal product of labor

11) Assume you deplete your savings to buy a new sofa and then take a vacation in a foreign country. Which of the following is true? A) consumption will increase B) net exports will increase C) government purchases will increase D) investment will increase

12) The aggregate demand and supply model in Chapter 5 A) differs in terms of underlying economics from the demand and supply model used in microeconomics B) uses the term "price" for the average price level of all the goods and services we buy C) uses an AS-curve that is vertical in the long run and horizontal in the very short run D) all of the above

13) If private domestic saving in an economy increases, which is the most likely to occur? A) a decrease in net exports B) an increase in consumption C) an increase in imports D) an increase in private domestic investment

14) Countries can achieve continued economic growth as long as A) technological advances continue B) educational progress continues C) intelligent resource management is practiced D) all of the above

15) If a shift in the AD-curve has no impact on the price level, then A) the unemployment rate must be extremely low B) the AD-curve must be vertical C) the AS-curve must be horizontal D) the AS-curve must be vertical

Answer 1

1.) In the short run, a price decrease combined with an increase in the unemployment rate is most likely to be the result of:

Answer (C) a decrease in money supply

When the money supply decreases, it leads to the decrease in the aggregate demand. Since decrease in money supply is a contractionary measure leaves the economy with less to spend. Therefore decrease in money supply results in an adverse affect on the AD. Which result in the decrease in prices and increase in unemployement.

As the aggregate expenditure decreases, the economy's real GDP has decreases, it results in the decreased demand for labor force. Therefore the employers demand less labor and it eventually leads to the increase in unemployement.

2) Potential GDP is the value of GDP that can be calculated if we assume that:

Answer (D) the capital stock is working at full capacity and we have full employment

The potential GDP is the maximum GDP that an economy can achieve. It is where everything is working at its fullest potential. Potential GDP gives the economy an ideal which it can achieve.

Why other options are not correct:

Whereas, the unemployment rate is not zero. Since there is always some level of unemployment, and it is zero unemployment is unachievable. Therefore even at the potential GDP, unemployment exists.

The inflation rate at the potential GDP is not zero, but rather is constant.

GDP has not been adjusted with inflation at the potential GDP. The adjusted GDP is rather real GDP and not potential.

Therefore the option D is correct.

3) Which of the following is NOT a source of increased factor productivity:

Answer (C) more efficient resource allocation

Efficient resource allocation doesn't increase the factor productive. Since factor productivity is the capacity of input factor to produce the output. Therefore any increase in the productive capacity of the factor of production will result in the increase in factor productivity.

WHy other options are not correct:

A) advances in knowledge: Since the advancement in knowledge result in the increase in the labor potential. Thereofre it increases factor productivity.

B) growth in the size of the labor force: As the labor force increases, there will be more labor force to produce. Therefore it increased the factor productivity.

D) technological progress: It is evident that how the technological progress leads to the increase in the productivity capacity of the nation.  

Therefore option (C) is the correct answer. That is better allocation doesnt increase factor productivity.

4) Okun's law states that one extra percentage point in unemployment causes:

Answer (A) a 2 percent fall in GDP

According to Okun's law, that for every 1% increase in unemployement, there is 2% fall in the GDP. Therefore option A is correct.

5) If output is at its full-employment level, then:

Answer (B) the natural rate of unemployment is zero

Full employment equilibrium output doesn't mean zero unemployment, But it rather means zero natural rates of unemployment. It means that labor market is in equilibrium. Since natural unemployed includes structural and frititional unemployment. Therefore at the full employment output, the structural and frictional unemployment is zero.

The labor force is efficiently utilized in such a way that all skilled and unskilled workers are working and employed. That means that whoever is willing and able to work at the existing the wage rate, they are able to get the job quickly. Even if one chooses to move from one place to another, it doesn't leas to frictional unemployed.

6) The income velocity of money can be calculated using the following formula

Answer (C) V = (PY)/M

Since by the fisher quantity theory of money;

MV = PY

where M = money supply

V = Velocity of money

P = price level

And Y = Output

Therefore,

Velocity of money from the fisher's equation is:

MV = PY

V = PY/M

Therefore velocity of money can be calculated using the following formula V = (PY)/M

7) Assume that the prices of cars manufactured in the U.S. increase due to an increase in quality.

Answer (A) real GDP should increase

Since the prices have increased because of the increase in the quality. It means that the value of the cars has increased. The Rela GDP is the monetary value of all the goods and services with adjusted inflation. The price increase here wouldn't lead to inflation, as it has been accompanied with the increase in the value of the cars

If prices would have increased caused by other factors, without accompanied with the increase in the value of output. Then it would have affected nominal GDP and GDP deflator. Where GDP deflator measures the rate of change in prices. And nominal GDP is the GDP calculated without adjusted with inflation. But since, here the increase in price has not led to inflation, therefore it would only affect real GDP.

8) An endogenous growth model predicts that if the rates of population growth increases, then the growth rate of GDP per capita will

A) increase

Endogernous growth model is a theory that explains that how the economic growth of a country is dependent on all the factors in itself, which is within the control. That is, the growth is not dependent on outside factors.

According to the endogenous growth model, an increase in the population would result in more ideas generated and eventually it will increase the gdp per capita.

9) Given the Keynesian AS-curve, expansionary monetary policy will

C) increase both the level of output and the price level

Expansionary monetary policy focused on increasing the aggregate demand. And when aggregate demand increases, it leads to the excess demand at the old equilibrium, which results in an increase in aggregate supply in the long run. And therefore the price level as well as the output increases.

10) The relationship between the output produced in an economy, the input of factors of production, and the state of technological knowledge is called the

B) Aggregate production function

The production function draws the relationship between, input, output and the state of technological knowledge. It shows that how the increase in input or technology affects the output.

Whereas aggregate supply function is the willingness of the producers to supply at difference prices. It is the relationship between price and quantity.

Marginal product of labor is the additional product that an additional labor produces.

11) Assume you deplete your savings to buy a new sofa and then take a vacation in a foreign country. Which of the following is true?

A) consumption will increase

Since buying a new sofa is consumption expenditures and that too personal. And Consumption expenditure are expenditure done on consumer goods. Therefore it leads to the increase in the consumption component. Whereas the taking the trip to a foreign country wouldn't increase gdp of the country. As it doesnt lead to the increase in aggregate demand for the country's goods.

It is not an investment as it doesnt lead to any increase in capital stock. SInce it is not done by government, therefore it also not government purchased. And net exports only increases when they

12) The aggregate demand and supply model

D) all of the above

Since it is true that the ad and as model differs in terms of underlying economics from the demand and supply model used in microeconomic. As demand and supply model in microeconomics only takes into account the willingness and ability to pay and accept for goods in a given period. Whereas AD -AS model takes a lot of other variables into accounts. Like aggregate demand is made of four components, And aggregate supply is vertical in the very long run.

And it also uses the term "price" for the average price level of all the goods and services we buy

As we discussed AD-AS model uses an AS-curve that is vertical in the long run and horizontal in the very short run. Since in the long run, country's capacity of production is fixed. Therefore the aggregate supply is vertical and in the very short run, AS cant be changed. Therefore it is horizontal.

Therefore all of the above is the correct answer.

13) If private domestic saving in an economy increases, which is the most likely to occur?

D) an increase in private domestic investment

Savings and investment are one or the same thing, so when the consumers saves, it is a form of investment. As they keep the money in the bank, it is used as an investment. therefore increase in the private domestic savings leads to the increase in private investment.

14) Countries can achieve continued economic growth as long as

D) all of the above

As long the productive capacity continues to increase, the country will increase continue to see economic growth.

Since technological advances, educational progress intelligent resource management is practiced, all increases the factor productivity. And eventually leads to the increase in economic growth.

15) If a shift in the AD-curve has no impact on the price level, then

C) the AS-curve must be horizontal

WHen the aggregate supply is horizontal, the change in ad doesn't lead to the change in price level. As the supply in the very short run is horizontal, no matter tha change in AD, the prices won't change. If the AS is horizontal, change in aggregate demand means that excess demand or shortage is not met by the changes in supply. Therefore price would remain the same.