Unit 3 Review

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

Figure 10-1: Circular Flow Model

____ 1. Use the “Circular Flow Model” Figure 10-1. 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 investment 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 government spending equal to the decrease in investment spending.
____ 2. Use the “Circular Flow Model” Figure 10-1. 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
____ 3. Use the “Circular Flow Model” Figure 10-1. What are net exports in this economy?
A. $0
B. $30
C. $60
D. $100
E. $200
____ 4. Use the “Circular Flow Model” Figure 10-1. In this economy, how does the government finance its
purchases of goods and services?
 A. by printing money
B. by collecting taxes
C. by borrowing
D. By collecting taxes and borrowing
E. by collecting taxes and selling assets.
____ 5. An example of a government transfer is a(n):
A. expenditure on an interstate highway.
B. bequest from a deceased relative.
C. Social Security payment.
D. salary for members of the armed forces.
E. salary earned as an economist with a government agency.
____ 6. 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.
____ 7. GDP is the:
A. total market value of all final goods and services produced in one year.
B. total accumulated wealth of an economy.
C. volume of all dollar transactions made in an economy in one year.
D. dollar amount of all sales made in the economy in one year.
E. total quantity of money in circulation in the economy in one year.

Consumption Spending $65

Rental Income 10
Interest 35
Profit 20
Investment Spending 15
Wages 29
Government Purchases 18
Imports 7
Exports 3
Table 10-2: GDP

____ 8. Use Table 10-2. The GDP for 2007, was:

A. $94 billion.
B. $188 billion.
C. $168 billion.
D. $139 billion.
E. $108 billion.
____ 9. 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.
____ 10. 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.

Personal consumption expenditures $500

Gross private domestic investment 200
Net exports -5
State and local government purchases of goods 200
and services
Federal government purchases of goods and 100
services
Imports 15
Table 10-4: Measuring GDP (billions of dollars)

____ 11. Use Table 10-4. Government purchases of goods and services are:
A. $50 billion.
B. $100 billion.
C. $200 billion.
D. $300 billion.
E. $1000 billion.
____ 12. A laptop computer purchased by a private individual is considered to be:
A. consumption spending.
B. investment spending.
C. private saving.
D. a transfer of income.
E. a financial investment.
____ 13. 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.
____ 14. 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.
____ 15. Suppose a consumer buys a frozen cheese pizza at the grocery store at a price of $10. The frozen pizza
company sold the pizza to the store for $5. The frozen pizza company purchased the pizza dough and tomato
sauce from a food processing company at a price of $2 and bought the cheese from a dairy at a price of $1.
How much has GDP increased?
A. $2
B. $5
 C. $10
D. $18
E. $15
____ 16. 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.
____ 17. 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.
____ 18. 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.
____ 19. 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.

Year Output Price per Unit

1 2 $2
2 3 4
3 = base period 4 5
4 6 6
5 7 9
Table 11-2: Price and Output Data

____ 20. Use Table 11-2. The value of Year 2's output in real dollars is:
A. $4.
B. $12.
C. $6.
D. $16.
E. $15.

Gino’s pizza Bruno’s Carlo’s cookies Aldo’s salad

 spaghetti
2008 units of 4,000 3,000 2,000 5,000
output
2008 price per $10 $9 $6 $7
unit
2009 units of 4,000 1,000 1,000 2,000
output
2009 price per $8 $6 $1 $4
unit
Table 11-4: Pizza Economy III

____ 21. Use Table 11-4. Considering 2008 as the base year, real GDP in 2009 was:
A. $47,000.
B. $69,000.
C. $72,000.
D. $114,000.
E. $55,000

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 3 4 5
Price of Goods A $500 $550 $550
Quantity of Good B 10 10 10
Price of Good B $2 $4 $5
Scenario 11-1: Good A and Good B

____ 22. Use Scenario 11-1. In 2007, nominal GDP is:

A. greater than the nominal GDP in 2008.
B. greater than the nominal GDP in 2006.
C. equal to the nominal GDP in 2008.
D. equal to the nominal GDP in 2006.
E. less than the nominal GDP in 2006.
____ 23. The unemployment rate is defined as:
A. the percent 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 percent of the population that is unemployed.
____ 24. In order to be officially unemployed, a person must be:
A. looking for work in the past 4 weeks.
B. under 55 years old.
C. frictionally unemployed.
D. structurally unemployed.
E. retired or a full-time student.
____ 25. If the labor force is 100 million persons and 5 million are unemployed but actively seeking work, then the
unemployment rate is ________.
 A. 1%
B. 5%
C. 10%
D. 95%
E. 15%.

Demographic Group Number of Residents

Employed 5000
Unemployed and looking for 1000
work
Not working due to disability 200
Not working due to retirement 700
Unemployed and not looking for 500
work due to discouragement over
job prospects
Under the age of 16 2400
Total Population 9400
Table 12-3: Population Data for Madtucky

____ 26. Use Table 12-3. What is the unemployment rate in Madtucky?
A. 64%
B. 48%
C. 17%
D. 6%
E. 1%
____ 27. 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.

Scenario 12-1: Employment in youville

The country of Youville is made up of 10,000 people. Of this population, 1,000 residents are below the age of
16 and 2,000 have given up looking for work. Currently, 700 people are unemployed but are actively looking
for work; 2,500 work part time, and the remaining number are fully employed.

____ 28. Use Scenario 12-1. What is the unemployment rate in Youville?
A. 7.14%
B. 4.25%
C. 11.11%
D. 2%
E. 10%

Scenario 12-2: Employment Rate

In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one
unemployed worker, and two full time workers.

____ 29. Use Scenario 12-2. For this group, the labor force participation rate is:
 A. 30%.
B. 60%.
C. 70%.
D. 80%.
E. 50%.
____ 30. Unemployment rates tend to:
A. be the same across geographic areas.
B. vary depending upon age groups and ethnicities.
C. increase when an expansion in the economy occurs.
D. stay the same only when there is cyclical unemployment.
E. fall during economic recessions.
____ 31. Last week Stephanie quit her job as a copy-writer at an advertising agency. She has spent the past few days
browsing the help-wanted ads, but hasn't found anything that matches her skills. Stephanie is best classified
as:
A. structurally unemployed.
B. frictionally unemployed.
C. a discouraged worker.
D. out of the labor force.
E. cyclically unemployed.
____ 32. 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 13-1: Minimum Wage

____ 33. Use the “Minimum Wage” Figure 13-1. The binding minimum wage of P3 leads to unemployment of:
A. Q3 – Q1.
B. Q3 – Q2.
C. zero.
D. Q4 – Q2.
 E. Q4 – Q1.

Figure 13-2: Effect of Minimum Wage

____ 34. Use the “Effect of Minimum Wage” Figure 13-2. Suppose the labor market is in equilibrium at E when the
government introduces a minimum wage of WF. One problem that may arise is that the quantity of labor
supplied would ______, resulting in structural unemployment.
A. decrease to QD
B. stay at QE
C. increase to QS
D. stay at WE
E. decrease to zero.
____ 35. A minimum wage of $7.25 per hour might cause structural unemployment if the equilibrium wage in that
labor market is:
A. $7.25.
B. $8.00.
C. $10.00.
D. $7.30.
E. $6.85.
____ 36. 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.
____ 37. 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.
____ 38. Ron quit his job in retail management and moved to Florida with his wife, a physician who opened a new
practice there. He was not successful in his job search for the next four months. This type of unemployment is
known as:
A. structural unemployment.
B. cyclical unemployment.
C. frictional unemployment.
D. seasonal unemployment.
E. natural unemployment.
____ 39. 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.
____ 40. When hyperinflation forces Emily to visit her bank very frequently to keep her cash holdings to a minimum,
economists say that Emily is experiencing a:
A. search cost.
B. menu cost.
C. unit-of-account cost.
D. Fisher effect.
E. shoe-leather cost.
____ 41. Menu costs of inflation are the:
A. costs associated with money being a less reliable unit of measurement.
B. costs of transactions associated with avoiding the inflation tax.
C. costs associated with businesses changing prices.
D. revenue the government gets from printing money.
E. costs associated with negotiating lower prices.
____ 42. 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.
____ 43. When there is deflation in the economy:
A. the general price level falls.
B. the general price level increases.
C. the nominal interest rate rises.
D. the general price level becomes negative.
E. the Consumer Price Index becomes negative.
____ 44. If money income remains the same, while the average price level doubles, then:
A. nominal income will fall.
B. real income will fall.
C. nominal interest rates will fall.
D. purchasing power will rise.
E. home mortgage interest rates are likely to fall.
____ 45. 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%.
____ 46. 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.
____ 47. 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
____ 48. If the consumer price index changes from 120 to 125 between December 2007 and December 2008, the:
A. inflation rate for 2008 is 4.2%.
B. inflation rate for 2008 is 5%.
C. deflation rate for 2008 is 5%.
D. deflation rate for 2008 is –4.2%.
E. inflation rate for 2008 is 10%.
____ 49. You read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in
2008 would have cost
A. 20 percent more than the same market basket purchased in 2007.
B. 120 percent more than the same market basket purchased in 2007.
C. 20 percent more than the same market basket purchased in the base year.
D. 120 percent more than the same market basket purchased in the base year.
E. 20 percent less than the same market basket purchased in the base year.

Year CPI
2007 125
2008 120
Table 15-3: CPI
II

____ 50. Use Table 15-3. Calculate by how much the prices changed between 2007 and 2008.
A. Prices decreased by 5%.
B. Prices decreased by 4%.
C. Prices increased by 4%.
D. Prices increased by 5%.
E. Prices decreased by 20%.
Unit 3 Review
Answer Section

MULTIPLE CHOICE

1. ANS: C PTS: 1 DIF: M REF: Module 10

SKL: Critical Thinking
2. ANS: C PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
3. ANS: A PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
4. ANS: B PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
5. ANS: C PTS: 1 DIF: M REF: Module 10
SKL: Concept-Based
6. ANS: E PTS: 1 DIF: M REF: Module 10
SKL: Definitional
7. ANS: A PTS: 1 DIF: M REF: Module 10
SKL: Definitional
8. ANS: A PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
9. ANS: B PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
10. ANS: C PTS: 1 DIF: M REF: Module 10
SKL: Concept-Based
11. ANS: D PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
12. ANS: A PTS: 1 DIF: M REF: Module 10
SKL: Concept-Based
13. ANS: A PTS: 1 DIF: M REF: Module 10
SKL: Concept-Based
14. ANS: C PTS: 1 DIF: M REF: Module 10
SKL: Concept-Based
15. ANS: C PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
16. ANS: E PTS: 1 DIF: M REF: Module 10
SKL: Fact-Based
17. ANS: C PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
18. ANS: B PTS: 1 DIF: M REF: Module 10
SKL: Critical Thinking
19. ANS: E PTS: 1 DIF: M REF: Module 11
SKL: Analytical Thinking
20. ANS: E PTS: 1 DIF: M REF: Module 11
SKL: Critical Thinking
21. ANS: B PTS: 1 DIF: M REF: Module 11
SKL: Critical Thinking
22. ANS: B PTS: 1 DIF: M REF: Module 11
 SKL: Critical Thinking
23. ANS: A PTS: 1 DIF: M REF: Module 12
SKL: Definitional
24. ANS: A PTS: 1 DIF: M REF: Module 12
SKL: Fact-Based
25. ANS: B PTS: 1 DIF: M REF: Module 12
SKL: Critical Thinking
26. ANS: C PTS: 1 DIF: M REF: Module 12
SKL: Critical Thinking
27. ANS: B PTS: 1 DIF: M REF: Module 12
SKL: Concept-Based
28. ANS: E PTS: 1 DIF: M REF: Module 12
SKL: Analytical Thinking
29. ANS: E PTS: 1 DIF: M REF: Module 12
SKL: Critical Thinking
30. ANS: B PTS: 1 DIF: M REF: Module 12
SKL: Fact-Based
31. ANS: B PTS: 1 DIF: M REF: Module 13
SKL: Concept-Based
32. ANS: C PTS: 1 DIF: M REF: Module 13
SKL: Concept-Based
33. ANS: E PTS: 1 DIF: M REF: Module 13
SKL: Critical Thinking
34. ANS: C PTS: 1 DIF: M REF: Module 13
SKL: Concept-Based
35. ANS: E PTS: 1 DIF: M REF: Module 13
SKL: Critical Thinking
36. ANS: A PTS: 1 DIF: M REF: Module 13
SKL: Concept-Based
37. ANS: D PTS: 1 DIF: M REF: Module 13
SKL: Definitional
38. ANS: C PTS: 1 DIF: M REF: Module 13
SKL: Definitional
39. ANS: A PTS: 1 DIF: M REF: Module 13
SKL: Fact-Based
40. ANS: E PTS: 1 DIF: M REF: Module 14
SKL: Definitional
41. ANS: C PTS: 1 DIF: M REF: Module 14
SKL: Definitional
42. ANS: C PTS: 1 DIF: M REF: Module 14
SKL: Concept-Based
43. ANS: A PTS: 1 DIF: M REF: Module 14
SKL: Concept-Based
44. ANS: B PTS: 1 DIF: M REF: Module 14
SKL: Concept-Based
45. ANS: B PTS: 1 DIF: M REF: Module 14
SKL: Concept-Based
46. ANS: A PTS: 1 DIF: M REF: Module 14
SKL: Concept-Based
47. ANS: C PTS: 1 DIF: M REF: Module 14
SKL: Critical Thinking
48. ANS: A PTS: 1 DIF: M REF: Module 15
SKL: Critical Thinking
49. ANS: C PTS: 1 DIF: M REF: Module 15
SKL: Concept-Based
50. ANS: B PTS: 1 DIF: M REF: Module 15
SKL: Critical Thinking