Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Unit 2 review Multiple Choice Identify 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. The circular-flow diagram illustrates how firms goods and services and factors of production. A. buy; sell B. buy; buy C. sell; buy D. sell; sell E. buy; own 3. Private savings is: A. disposable income less taxes. B. disposable income less consumption. C. wealth. D. wealth plus government transfer payments. E. disposable income plus transfer payments. Figure 10-1: Circular Flow Model 4. Use the Circular Flow Model Figure What is GDP in this economy? A. \$100 B. \$400 C. \$500 D. \$600 E. \$ Use the Circular Flow Model Figure If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to happen if there is a decrease in consumer spending? A. an increase in the nominal GDP B. an increase in the real GDP C. an increase in the unemployment rate D. an increase in the inflation rate E. an increase in investment spending equal to the decrease in consumer spending. 6. Use the Circular Flow Model Figure If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to happen if there is an increase in investment spending? A. a decrease in the nominal GDP B. an increase in the nominal GDP C. an increase in the unemployment rate D. a decrease in the inflation rate E. a decrease in government spending equal to the increase in investment spending. 7. Use the Circular Flow Model Figure If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to happen if there is an increase in exports? A. a decrease in the nominal GDP B. a decrease in the real GDP C. a decrease in the unemployment rate D. a decrease in the inflation rate E. an increase in imports

2 A. a decrease in the nominal GDP B. a decrease in the real GDP C. a decrease in the unemployment rate D. a decrease in the inflation rate E. an increase in imports 8. Use the Circular Flow Model Figure If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to happen if there is a decrease in exports? A. a decrease in the nominal GDP B. an increase in the real GDP C. a decrease in the unemployment rate D. an increase in the inflation rate E. a decrease in imports. 9. Use the Circular Flow Model Figure If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to happen if there is a decrease in imports? A. an increase in the nominal GDP B. a decrease in the nominal GDP C. an increase in the unemployment rate D. an increase in the nominal GDP, a decrease in the nominal GDP, and an increase in the unemployment rate E. a decrease in imports 10. Use the Circular Flow Model Figure What is disposable income in this economy? A. \$0 B. \$100 C. \$400 D. \$500 E. \$ 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. 12. Most households derive the bulk of their income from which of the following sources? A. wages B. interest C. profit D. rent E. transfer payments. 13. Disposable income equals: A. income plus taxes plus government transfers. B. income plus government spending minus taxes. C. income minus taxes plus government spending. D. income minus taxes minus government transfers. E. income plus government transfers minus taxes. 14. Disposable income in a particular period is: A. total income earned. B. income earned plus government transfer payments. C. income earned plus government transfer payments less taxes. D. income earned plus government transfer payments less taxes and savings. E. consumption spending less savings.

3 15. Government borrowing is: A. the amount of funds raised by government in the financial markets. B. the amount of government spending on goods and services. C. the amount of government tax revenues collected. D. the amount of government spending on transfer payments. E. the amount of new money the government prints to pay the nation s bills. 16. If we add up the consumer spending on goods and services, investment spending, government purchases of goods and services, and the value of exports, then subtract the value of imports, we have measured the nation's. A. disposable income. B. gross domestic product. C. trade deficit. D. value added. E. national debt. Rent \$2,400 Consumption Spending 7,900 Social Security Benefit 6,100 Investment Spending 2,100 Wages and Salaries 6,500 Exports 800 Interest 1,900 Government Purchases of 2,600 goods and services Profits 1,400 Imports 1,200 Purchase of stocks 6,300 Unemployment Compensation 3,950 Payroll Taxes 2,965 Sales Taxes 1,300 Table 10-1: Calculating GDP 17. Use Table Using the information in the table provided, which of the following is the correct calculation for GDP in 2008? A. \$47,475 B. \$12,200 C. \$21,485 D. \$34,085 E. \$12, Enchante Inc., a designer clothing company buys \$400 worth of silk from a silk trader, and \$30 worth of accessories from AccessoriesRUs to produce each dress. If the value-added by Enchante is equal to \$200, then according to the value-added approach, the price of the designer dress should be: A. \$630. B. \$230. C. \$200. D. \$830. E. \$ The Boeing Corporation buys \$3 million worth of steel from the Steel manufacturers, \$2.5 million worth of computerized hardware and software, and \$1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing Corporation sells this particular model of aircraft at \$10 million. The value-added by Boeing is equal to: A. \$3.5 million. B. \$16.5 million. C. \$13 million. D. \$15.5 million. E. \$10 million.

4 A. \$3.5 million. B. \$16.5 million. C. \$13 million. D. \$15.5 million. E. \$10 million. 20. 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. 21. Which of the following best represents the equation for GDP? A. GDP = C+ I + G X + IM B. GDP = C + I + G + X IM C. GDP = C + I + G + Taxes Value Added D. GDP = C + I + G + Taxes + X + IM E. GDP = C + I + G + Taxes Transfers + X - IM 22. Net exports are calculated by subtracting: A. taxes from total income. B. exports from imports. C. out all intermediate goods. D. I, G, and value added from GDP. E. imports from exports. 23. Which of the following would NOT be a part of GDP? A. used car sales B. new residential construction C. a new truck purchased by a building contractor D. telephone service purchased for a home E. a new suit purchased by a job applicant. 24. An intermediate good would be: A. a new boat purchased by a professor to be used on vacation. B. lumber used in building a house. C. payments to military personnel. D. a professor's salary. E. the natural gas used to heat the professor s home. 25. Which of the following would be an example of an intermediate good? A. stocks and bonds purchased by a business executive B. a cellular telephone purchased by a college student C. a wedding ring purchased by an engineer for his fiancée D. tires purchased from Goodyear by General Motors for newly produced electric cars E. a subscription for satellite television services from DirectTV. Stage of production Sales value of material Timber 100 Milled wood 300 Finished wood 600 Assembled furniture 800 Retail price to consumer 1200 Table 10-3: Furniture Production Schedule 26. Use Table What is the value added at all stages of the production process of the furniture as described in the accompanying table? A. \$800 B. \$1,200 C. \$1,800 D. \$2,000 E. \$3000

5 A. \$800 B. \$1,200 C. \$1,800 D. \$2,000 E. \$ 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. \$86,000 B. \$36,000 C. \$31,000 D. \$50,000 E. \$46, Value added in national income accounts refers to the: A. value added by labor to the production process. B. difference in the final price and the value of inputs purchased. C. difference in profits at various stages of production. D. value of all the inputs used by the final producer. E. value of the materials used in the last stage of production. Personal consumption expenditures \$500 Gross private domestic investment 200 Net exports -5 State and local government purchases of goods and 200 services Federal government purchases of goods and 100 services Imports 15 Table 10-4: Measuring GDP (billions of dollars) 29. Use Table Exports are: A. \$5 billion. B. \$0 billion. C. \$5 billion. D. \$10 billion. E. \$15 billion. 30. Which of the following would be included in the calculation of GDP? A. expenditure on new construction B. a retiree's monthly Social Security check C. buying an existing house D. buying shares of Home Depot stock E. volunteering to coach your child s soccer team. 31. Included as an addition to GDP would be: A. the dollar value of a used car sold during the period. B. the dollar value of a new car imported during the period. C. the dollar value of a new car exported during the period. D. the purchase of 100 shares of General Motors stock. E. the dollar value of a do-it-yourself home repair. 32. Which of the following transactions would be included in the nation's gross domestic product? A. A college student buys a used textbook from his roommate. B. A construction company purchases lumber to use in building a new house. C. A college student has a pizza delivered to her dorm room. D. A group of college students volunteer to rake leaves at an assisted living facility for senior citizens. E. A family saves \$5000 in their bank.

6 33. Households receive income in the form of all the following EXCEPT: A. wages. B. dividends. C. interest. D. investment spending. E. rent. 34. 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. 35. Gross domestic product measures the: A. amount of money circulating through an economy during a year. B. value of final goods and services produced within the borders of a country during a given time period. C. value of final goods and services produced by the citizens of a country regardless of their location during a given time period. D. amount of government spending undertaken during a given time period. E. amount of national debt accumulated by the government during a given time period. 36. In the circular flow diagram, government purchases of goods and services are financed by: A. tax revenues. B. tax revenues net of transfer payments. C. government 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. 37. Construction of new homes is considered part of: A. investment spending. B. consumption. C. government spending. D. private saving. E. the stock market. 38. Suppose only two countries existed in the world. Country A imported \$200 million worth of goods and services from Country B. Country B imported \$100 million worth of goods and services from Country A. This means that net exports for: A. Country A equals \$200 million. B. Country B equals \$200 million. C. Country A equals \$100 million. D. Country B equals \$100 million. E. Country A equals \$100 million. 39. Double counting would occur if: A. GDP was calculated by adding together C, I, G, and NX. B. used goods were included in the GDP calculation. C. imports were subtracted from GDP. D. inventories were added to the GDP calculation. E. new construction was counted as investment spending. 40. Consider an economy that only produces two goods: DVDs and DVD players. Last year, 10 DVDs were sold at \$20 each and 5 DVD players were sold at \$100 each, while this year 15 DVDs were sold at \$10 each and 10 DVD players were sold at \$50 each. Real GDP this year using last year as the base year is: A. \$100. B. \$700. C. \$1,300. D. \$300 E. \$650

7 A. \$100. B. \$700. C. \$1,300. D. \$300 E. \$650 Year Units of Output Price per Unit 1 40 \$ Table 11-3: Real and Nominal Output 41. Use Table The year in which the increase in nominal GDP is exclusively due to the increase in the price level rather than physical output is Year: A. 2. B. 3. C. 4. D. 6. E 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. 43. If the price level in the economy and the nominal wages both doubled, then the real wages would: A. also double. B. increase by 50%. C. decrease by 20%. D. decrease by 50%. E. remain unchanged. 44. Real GDP is the same as A. current dollar GDP. B. interest rate adjusted GDP. C. nominal GDP. D. value added GDP. E. inflation adjusted GDP. The town of York produces two goods, Good A and Good B. The following is information regarding York's production of these two goods and their prices the following three years. Year 2006 Year 2007 Year 2008 Quantity of Good A Price of Goods A \$500 \$550 \$550 Quantity of Good B Price of Good B \$2 \$4 \$5 Scenario 11-1: Good A and Good B 45. Use Scenario Using 2006 as the base year, then one would find that the real GDP in 2006: A. is equal to the real GDP in B. is equal to the nominal GDP in C. is greater than the real GDP in D. is greater than the real GDP in E. is the same as real GDP in 2007.

8 A. is equal to the real GDP in B. is equal to the nominal GDP in C. is greater than the real GDP in D. is greater than the real GDP in E. is the same as real GDP in 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. 47. 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 equivalent E. be out of work and not a full-time student. 48. If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its unemployment rate is: A. 4%. B. 7.5%. C. 10%. D. 67.5%. E. 30% 49. Which one of the following is correct? A. B. C. D. E. 50. If the labor force totals 100 million persons and 90 million are actively working, then the unemployment rate is. A. 1% B. 5% C. 10% D. 90% E. 11% 51. Assuming that there are 100 million people in the total population with a labor force of 50 million and 47 million of those workers are employed, the unemployment rate is: A. 3%. B. 6%. C. 8%. D. 10%. E. 15%. 52. The presence of discouraged workers in the economy tends to: A. raise the official unemployment rate. B. lower the official unemployment rate. C. lower the number of people who are frictionally unemployed. D. increase the number of people who are structurally unemployed. E. have no impact on the official unemployment rate. 53. Which of the following is an example of an unemployed worker? A. Julio, a statistician who lost his job in a forecasting firm and now does consulting work part time. B. Jennifer, an accountant who spends her days at home reading the New York Times and mailing her resume to accounting firms. C. Ana Maria, a business major who received a job offer during her senior year but has yet to start working. D. Ulysses, a high school dropout who joined the Army. E. Freddy, recent a college graduate who is traveling in Europe for the next three months.

9 A. Julio, a statistician who lost his job in a forecasting firm and now does consulting work part time. B. Jennifer, an accountant who spends her days at home reading the New York Times and mailing her resume to accounting firms. C. Ana Maria, a business major who received a job offer during her senior year but has yet to start working. D. Ulysses, a high school dropout who joined the Army. E. Freddy, recent a college graduate who is traveling in Europe for the next three months. 54. Unemployment rates tend to decrease when: A. there is an expansion in the economy. B. discouraged workers become active job seekers. C. underemployed workers become unemployed. D. a contraction in the economy occurs. E. the business cycle is approaching the trough. 55. A worker classified as frictionally unemployed is one who is: A. let go during a recession. B. discouraged and drops out of the labor force. C. voluntarily looking for work, somewhere a job exists that demands his or her skills. D. works part-time but would prefer to work full-time. E. let go because her employer has decided to move the factory to another country. 56. Structural unemployment consists of people who are unemployed due to: A. temporary changes in jobs. B. an excess in the quantity of labor demanded over the quantity of labor supplied. C. the time it takes for employers and workers to find each other. D. more people seeking jobs in a labor market than there are jobs available at the current wage rate. E. downturns in the business cycle. 57. 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. 58. A minimum wage in a labor market is set the equilibrium wage and creates a of labor. A. below; surplus B. equal to; an efficient allocation C. above; surplus D. above; shortage E. below; shortage Figure 13-2: Effect of Minimum Wage 59. Use the Effect of Minimum Wage Figure Suppose that after some time with a minimum wage of W F, the government abolishes the minimum wage. Employment would: A. decrease to Q E. B. increase to Q S. C. stay at Q E. D. decrease to zero. E. increase to Q E. 60. In the absence of minimum wages, efficiency wages, or labor unions, a decline in the demand

10 for labor would likely result in which of the following if wages are flexible? A. Higher levels of employment. B. No changes in employment. C. A lower level of employment but likely no change in the unemployment rate. D. A lower level of employment and a higher unemployment rate. E. A lower level of employment and a lower unemployment rate. 61. When the demand for labor is falling and employers have committed to high wages, unemployment will result. A. frictional B. cyclical C. permanent D. structural E. natural 62. Firms pay efficiency wages because: A. it reduces the risk of losing the best workers. B. it is required by law. C. they don't have to offer health insurance if they pay efficiency wages. D. it reduces the employee's income tax liability. E. they are contractually required to do so. 63. If actual unemployment is 6.2% and the natural rate of unemployment is 4%, cyclical unemployment is: A. 6.2%. B. 10.2%. C. 4%. D. 2.2%. E. 3.2% 64. 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. 65. Cyclical unemployment: A. rises during recession. B. falls during recession. C. rises during expansion. D. is a part of natural unemployment. E. is at its highest levels at the peak of the business cycle. 66. The natural rate of unemployment: A. includes frictional, structural, and cyclical unemployment. B. is equal to zero. C. is always greater than the actual unemployment rate. D. includes structural and frictional unemployment. E. is equal to zero when there is no cyclical unemployment. 67. Cyclical unemployment is the result of: A. normal job turnover ( job search ). B. discrimination. C. the business cycle. D. the minimum wage. E. changing job skills.

11 A. normal job turnover ( job search ). B. discrimination. C. the business cycle. D. the minimum wage. E. changing job skills. 68. In 2007, the Bureau of Labor Statistics calculated the unemployment rate to be 7.5%. If the frictional unemployment was 1% and the structural unemployment was 1.5%, then the natural rate of unemployment would be: A. 4.5%. B. 5%. C. 1%. D. 5.5%. E. 7.5% 69. Internet employment agencies have simplified the job search process for the applicants. More importantly, it has led to: A. an increase in frictional unemployment. B. an increase in cyclical unemployment. C. a decrease in frictional unemployment. D. a decrease in structural unemployment. E. a decrease in cyclical unemployment. 70. The sum of frictional and structural unemployment make up the: A. actual unemployment level. B. cyclical amount of unemployment. C. amount of unemployment in an economy during an expansion. D. amount of unemployment in an economy during a recession. E. natural rate of unemployment. 71. Structural changes in an economy as well as changes in consumer tastes are reasons for: A. job creation and job destruction. B. job searches. C. unemployment during recessions. D. unemployment during expansions. E. business cycles. 72. Structural unemployment occurs when: A. new workers enter the work force. B. there is a surplus of labor at the current wage rate. C. there is an expansion in the economy. D. there is cyclical unemployment. E. jobs are lost due to recessions. 73. An effective minimum wage can lead to: A. frictional unemployment. B. structural unemployment. C. a decrease in wages. D. a shortage of workers in that labor market. E. seasonal unemployment. 74. Labor unions that are effective at achieving wage rates: A. lower than the equilibrium wage rate may unintentionally cause frictional unemployment. B. equal to the equilibrium wage rate may cause shortages in that labor market. C. higher than the equilibrium wage rate may also result in structural unemployment. D. higher than the equilibrium wage rate may cause shortages in that labor market. E. equal to the equilibrium wage rate may cause surpluses in that labor market. 75. The natural rate of unemployment: A. equals zero. B. equals the actual rate of unemployment when cyclical unemployment equals zero. C. equals cyclical and actual rates of unemployment. D. fluctuates around the actual rate of unemployment. E. equals zero at the peak of the business cycle.

12 A. equals zero. B. equals the actual rate of unemployment when cyclical unemployment equals zero. C. equals cyclical and actual rates of unemployment. D. fluctuates around the actual rate of unemployment. E. equals zero at the peak of the business cycle. 76. Amy just graduated from college. She recently quit her part time job to focus on finding a full time job which uses her skills she has acquired in college better. Amy is considered: A. structurally unemployed. B. out of the labor force. C. cyclically unemployed. D. employed since she is focusing on finding a full time job. E. frictionally unemployed. 77. 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. 78. When inflation rises quickly: A. borrowers will be hurt and lenders will benefit. B. lenders will be hurt and borrowers will benefit. C. both borrowers and lenders will be hurt. D. both borrowers and lenders will benefit. E. lenders will be hurt and those on fixed incomes will benefit. 79. Shoe-leather costs refer to the: A. effect of inflation on the prices of food, clothes, and other necessities. B. increased cost of transactions due to inflation. C. high price of leather goods. D. effect of inflation on transportation costs. E. effect of inflation on clothing. 80. The invention of ATM machines reduced: A. menu costs of inflation. B. shoe-leather costs of inflation. C. unit-of-account costs of inflation. D. seignorage. E. search costs of inflation. 81. When hyperinflation forces Pedro to change the price stickers on the books in his bookstore very frequently to keep up with the aggregate price level, economists say that Pedro is experiencing a: A. shoe-leather cost. B. Fisher effect. C. unit-of-account cost. D. debt deflation. E. menu cost. 82. Suppose that a country has a progressive income tax code, where taxable income is calculated in nominal terms but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation will find that, overtime, she will pay: A. the alternate minimum tax. B. a lower percentage of her income in taxes over time. C. the same percentage of her income in taxes over time. D. a higher percentage of her income in taxes over time. E. the capital gains tax. 83. Unit-of-account costs refer: A. to the increases in prices during inflation. B. the decrease in value of money during inflation. C. the loss of reliability of money as a relative unit of measurement. D. the increased costs of servicing bank accounts during inflation. E. the gradual erosion of purchasing power during inflation.

13 A. to the increases in prices during inflation. B. the decrease in value of money during inflation. C. the loss of reliability of money as a relative unit of measurement. D. the increased costs of servicing bank accounts during inflation. E. the gradual erosion of purchasing power during inflation. 84. Over the last year, Eli has been working very hard and his employer has taken notice by giving him a 6% raise in his salary. During this last year, overall prices in the economy have increased by 4%. Given this information, Eli's real wage has: A. stayed constant. B. increased by 6%. C. increased by 10%. D. decreased by 4%. E. increased by 2%. 85. During rapid price inflation, firms must frequently change prices. The cost of changing prices is known as the: A. menu costs. B. real interest rate costs. C. shoe-leather costs. D. unit-of-account costs. E. Fisher effect. 86. Deflation is a(n): A. decrease in the purchasing power of a unit of money. B. appreciation of the nation's currency. C. decrease in the average level of prices. D. increase in the average level of prices. E. problem only for developing nations. 87. An increase in the price level that is extremely rapid (say 400% per year) is called: A. hyperinflation. B. inflation. C. deflation. D. hyperdeflation. E. disinflation. 88. 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. 89. 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%. 90. Which of the following represents the best scenario for a bank lending its money to a customer? A. fixed interest rate of 8% with 1% inflation B. fixed interest rate of 11% with 5% inflation C. fixed interest rate of 12% with 7% inflation D. fixed interest rate of 19% with 15% inflation E. fixed interest rate of 10% with 7% inflation 91. 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.

14 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. 92. Unanticipated inflation: A. reduces the value of money. B. increases the value of future obligations. C. increases certainty about the future. D. helps lenders. E. harms borrowers. 93. 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 the because the actual rate of inflation was than the anticipated rate of inflation. A. borrower; lower B. borrower; higher C. lender; higher D. lender; lower E. lender; equal to 94. 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. 95. The is the most widely used measure of inflation in the United States. A. producer price index B. consumer price index C. GDP deflator D. national income account E. growth rate of real GDP 96. If the cost of a market basket is \$150 in Year 1 and \$200 in Year 2, the price index for Year 1 with a Year 2 base is: A. 75. B C D E. 95. Year Consumer Price Index (base year) Table 15-1: The Consumer Price Index 97. Use Table The approximate rate of inflation in Year 3 is percent. A. 1 B. 10 C. 19 D. 20 E. 5

15 98. Use Table The approximate rate of inflation in Year 5 is percent. A. 5 B. 10 C. 19 D. 20 E. 150 Year Price Index Table 15-2: Price Index 99. Use Table Consider the information in table provided. Which year is most likely to be the base year? A B C D E. A year not presented in the table Which one of the following price indices is commonly used to measure the cost of living? A. producer price index B. wholesale price index C. human development index D. GDP deflator E. consumer price index Unit 2 review Answer Section MULTIPLE CHOICE 1. ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module 10

16 13. ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: D REF: Module 10 SKL: Analytical Thinking 20. ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: D REF: Module 11 SKL: Analytical Thinking 41. ANS: D PTS: 1 DIF: M REF: Module 11

17 42. ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module 13

18 71. ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module 15

19 100. ANS: E PTS: 1 DIF: E REF: Module 15

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