Measuring the Economy 2: Review Test

1. What is an example of inflation?

Ice cream used to cost 5 cents, but now it costs 75 cents
The US produces more now than it used to
GDP increases over the years
Ice cream used to cost 75 cents, but now it costs 5 cents

2. What is inflation?

An increase in the purchasing power of the dollar
A decrease in the purchasing power of the dollar
An increase in the purchasing power of foreign currency
A decrease in the purchasing power of foreign currency

3. What is the effect of a small amount of inflation over many years?

Nothing
A small increase in the price level
A large increase in the price level
A decrease in the price level

4. What would be the approximate increase in the price level if inflation was at 5% for 70 years?

2-fold
5-fold
10-fold
30-fold

5. What does inflation affect?

The value of the dollar
Unemployment
Output
Nothing

6. What is the price level most commonly used in the US?

GDP
CPI
GDP deflator
None of the above

7. Which of the following is based on a fixed basket of goods and services?

GDP
GDP deflator
CPI
None of the above

8. Which of the following is based on a flexible basket of goods and services?

CPI
Inflation rate
Unemployment rate
GDP

9. If the CPI in period 1, the base year, is 100 and the CPI in period 3 is 150, what is the inflation rate from period 1 to period 3?

50%
250%
-50%
Not enough information given

10. If the CPI in period 2 is 120 and the CPI in period 5 is 200, what else do you need to know to determine the inflation rate from period 2 to period 5?

Nothing
If the CPI's use the same base year
If the CPI's are based on the same consumer
If there has been a depression between period 2 and period 5

11. If the CPI in period 2 is 120 and the CPI in period 5 is 200, what is the inflation rate from period 2 to period 5 given that the CPI's are based on the same base year?

50%
80%
67%
-80%

12. How does the base year for the CPI differ from comparison years?

The base year is where the prices come from
The comparison year is where the quantities come from
There is no difference between the base year and the comparison year
The base year is where the quantities come from

13. What is the difference between the base year and the comparison year for the GDP deflator?

The base year is where the prices come from and the comparison year is where the quantities come from
The base year is where the quantities come from and the comparison year is where the prices come from
The base year is where the prices come from and the comparison year is also where the price come from
The base year is where the quantities come from and the comparison year is also where the quantities come from

14. What do you need to know to calculate the GDP deflator?

Nominal GDP only
Nominal GDP and real GDP
Real GDP only
Neither nominal GDP nor real GDP

15. If the nominal GDP in period 2 is 120 and the real GDP is 200, what is the GDP deflator?

80
60
60
80

16. What is the rate of inflation from period 1 to period 3, using the GDP deflator method, given that the nominal GDP in period 3 is $74 and real GDP in period 3 using period 1 as the base year is $64?

22%
20%
18%
16%

17. How is a Laspeyres index different from a Paasch index?

A Laspeyres index has a fixed basket of goods and services while a Paasch index has a flexible basket of goods and services
A Laspeyres index has a flexible basket of goods and services while a Paasch index has a fixed basket of goods and services
A Laspeyres index has a no basket of goods and services while a Paasch index has a flexible basket of goods and services
A Laspeyres index has a fixed basket of goods and services while a Paasch index has no basket of goods and services

18. Which of the following pairs of terms best fit together?

GDP deflator and Laspeyres index
CPI and Laspeyres index
CPI and Paasch index
GDP deflator and cost of living

19. Which of the following best describes the direction of the errors created by the CPI and GDP deflator methods of estimating the impact of inflation on the consumer?

CPI underestimates and GDP deflator underestimates
CPI underestimates and GDP deflator overestimates
CPI overestimates and GDP deflator underestimates
CPI overestimates and GDP deflator overestimates

20. Which of the following is not a possible reason that the CPI overestimates inflation?

The substitution bias
The introduction of new goods
Unaccounted for quality changes
Individual differences between consumers

21. Which of the following is not a cost of expected inflation?

Redistribution of wealth
Shoeleather costs
Menu costs
Inconvenience

22. Which of the following is an effect of unexpected inflation?

Shoeleather costs
Redistribution of wealth
Menu costs
Increases in purchasing power

23. Which of following is not an effect of unemployment?

Lower standard of living
Emotional stress
Increased national output
Decreased national output

24. What is Okun's law?

A relationship between inflation and unemployment
A relationship between inflation and real GDP
A relationship between real GDP and nominal GDP
A relationship between real GDP and unemployment

25. What is the equation for Okun's law?

(percentage change in real GDP) = 3% - 2 * (change in the unemployment rate)
(percentage change in real GDP) = 1% - 2 * (change in the unemployment rate)
(percentage change in real GDP) = 3% - 3 * (change in the unemployment rate)
(percentage change in real GDP) = 5% - 3 * (change in the unemployment rate)

26. If a country had an unemployment rate of 8% in one year and 6% in the next, what would be percentage change in real GDP using Okun's law?

2%
7%
-7%
-2%

27. Which of the following is not one of the major types of unemployment?

Frictional unemployment
Cyclical unemployment
Age unemployment
Structural unemployment

28. What type of unemployment occurs because of the business cycle?

Frictional unemployment
Structural unemployment
Age unemployment
Cyclical unemployment

29. What type of unemployment occurs because of a mismatch between workers' skills and firms' needs?

Structural unemployment
Cyclical unemployment
Age unemployment
Frictional unemployment

30. What type of unemployment occurs because people are between jobs?

Structural unemployment
Frictional unemployment
Age unemployment
Cyclical unemployment

31. How do you calculate unemployment?

Employed divided by unemployed
Unemployed divided by employed
Unemployed divided by the sum of employed and unemployed
Employed divided by the sum of employed and unemployed

32. If there are 25 people employed, 20 people unemployed, and 30 people out of the labor force, what is the size of the labor force?

75
50
25
45

33. If there are 25 people employed, 20 people unemployed, and 30 people out of the labor force, what is the unemployment rate?

44%
50%
20%
36%

34. What is a reasonable estimate for the natural rate of unemployment?

0%
6%
10%
20%

35. When the economy is at full employment, what is a reasonable estimate for the rate of unemployment?

0%
3%
6%
9%

36. Which of the following causes of unemployment is not related to the wage paid to workers?

Minimum wage laws
Labor unions
Efficiency wages
Job search

37. What is a minimum wage law?

A law that dictates the smallest amount that a worker may be paid per hour
A law that dictates how much workers at all levels will earn per hour
A law that dictates how many hours workers must work
A law that dictates the minimum age a worker must be to obtain a wage

38. Why do labor unions create some unemployment?

Because they go on strike
Because they raise the wage above the market clearing wage
Because they do not allow everybody to join
Because they cost a large amount of money to join

39. What is the rationale behind efficiency wages?

When workers earn less money they are happier
When workers earn more money they are more likely to look for a new job
When workers earn more money they are more efficient
Workers will work for whatever a firm is willing to pay

40. What relationship does the Phillips curve describe?

The relationship between inflation and GDP
The relationship between inflation and the CPI
The relationship between inflation and interest rates
The relationship between inflation and unemployment

41. When is inflation often found?

During times of economic growth
During times of economic decline
When interest rates are very low
When unemployment is very high

42. What is the equation for the Phillips curve?

(inflation) = (unexpected inflation) - B * (cyclical unemployment rate) + (error)
(inflation) = (expected inflation) - B * (cyclical unemployment rate) + (error)
(inflation) = (expected inflation) - B * (frictional unemployment rate) + (error)
(inflation) = (expected inflation) - (cyclical unemployment rate)

43. When is the Phillips curve applicable?

In the very long run
In the long run
In the short run
Never

44. On what is the Phillips curve is based?

Theoretical figures
General observation of current conditions
Economic absolutes
Historical data

45. How is the Phillips curve useful?

As a general way to depict a relationship
As a model for policymaking
As a specific set of points that will occur in an economy
As a table of economic ideals

46. What is stagflation?

High inflation and low unemployment
High inflation and high unemployment
Low inflation and low unemployment
Low inflation and high unemployment

47. Who benefits from stagflation?

Politicians
Consumers
Nobody
Economists

48. What period of US history tends to refute the Phillips curve's general applicability?

1940-1950
1950-1960
1960-1970
1970-1980

49. Which of the following factors is not used in the computation of the Phillips curve?

GDP
Unemployment
Energy prices
Inflation

1. What is an example of inflation?

2. What is inflation?

3. What is the effect of a small amount of inflation over many years?

4. What would be the approximate increase in the price level if inflation was at 5% for 70 years?

5. What does inflation affect?

6. What is the price level most commonly used in the US?

7. Which of the following is based on a fixed basket of goods and services?

8. Which of the following is based on a flexible basket of goods and services?

9. If the CPI in period 1, the base year, is 100 and the CPI in period 3 is 150, what is the inflation rate from period 1 to period 3?

10. If the CPI in period 2 is 120 and the CPI in period 5 is 200, what else do you need to know to determine the inflation rate from period 2 to period 5?

11. If the CPI in period 2 is 120 and the CPI in period 5 is 200, what is the inflation rate from period 2 to period 5 given that the CPI's are based on the same base year?

12. How does the base year for the CPI differ from comparison years?

13. What is the difference between the base year and the comparison year for the GDP deflator?

14. What do you need to know to calculate the GDP deflator?

15. If the nominal GDP in period 2 is 120 and the real GDP is 200, what is the GDP deflator?

16. What is the rate of inflation from period 1 to period 3, using the GDP deflator method, given that the nominal GDP in period 3 is $74 and real GDP in period 3 using period 1 as the base year is $64?

17. How is a Laspeyres index different from a Paasch index?

18. Which of the following pairs of terms best fit together?

19. Which of the following best describes the direction of the errors created by the CPI and GDP deflator methods of estimating the impact of inflation on the consumer?

20. Which of the following is not a possible reason that the CPI overestimates inflation?

21. Which of the following is not a cost of expected inflation?

22. Which of the following is an effect of unexpected inflation?

23. Which of following is not an effect of unemployment?

24. What is Okun's law?

25. What is the equation for Okun's law?

26. If a country had an unemployment rate of 8% in one year and 6% in the next, what would be percentage change in real GDP using Okun's law?

27. Which of the following is not one of the major types of unemployment?

28. What type of unemployment occurs because of the business cycle?

29. What type of unemployment occurs because of a mismatch between workers' skills and firms' needs?

30. What type of unemployment occurs because people are between jobs?

31. How do you calculate unemployment?

32. If there are 25 people employed, 20 people unemployed, and 30 people out of the labor force, what is the size of the labor force?

33. If there are 25 people employed, 20 people unemployed, and 30 people out of the labor force, what is the unemployment rate?

34. What is a reasonable estimate for the natural rate of unemployment?

35. When the economy is at full employment, what is a reasonable estimate for the rate of unemployment?

36. Which of the following causes of unemployment is not related to the wage paid to workers?

37. What is a minimum wage law?

38. Why do labor unions create some unemployment?

39. What is the rationale behind efficiency wages?

40. What relationship does the Phillips curve describe?

41. When is inflation often found?

42. What is the equation for the Phillips curve?

43. When is the Phillips curve applicable?

44. On what is the Phillips curve is based?

45. How is the Phillips curve useful?

46. What is stagflation?

47. Who benefits from stagflation?

48. What period of US history tends to refute the Phillips curve's general applicability?

49. Which of the following factors is not used in the computation of the Phillips curve?

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