Chapter 1

Introduction to
Macroeconomics
1) Which of the following is
NOT a topic studied in
Macroeconomics?
A) gross domestic product
B) the unemployment rate
C) the price of IBM computers
D) the inflation rate
Answer: C
2) Which of the following is a
topic studied in
Macroeconomics?
A) gross domestic product
B) the wage of auto workers
C) the price of IBM computers
D) the amount of pizza
produced
Answer: A
3) Which of the following is a
topic studied in
Macroeconomics?
A) the functioning of individual
industries
B) aggregate behavior of
households and industries
C) the behavior of individual
households
D) the decision- making
behavior of individual business
firms
Answer: B
4) Prices that do not always
adjust rapidly to maintain
equality between quantity
supplied and quantity
demanded are
A) administered prices.
B) sticky prices.
C) regul

B) 11.1%.
C) 18%.
D) 80%.
Answer: A
30) The period in the business
cycle from a trough to peak is
called a(n)
A) recession.
B) expansion.
C) slump.
D) depression.
Answer: B
31) If output is rising and
unemployment is falling, the
economy MUST be in a(n)
A) contraction.
B) expansion.
C) depression.
D) hyperinflationary period.
Answer: B
32) The period in the business
cycle from a peak to a trough is
a(n)
A) recession.
B)boom.
C) expansion.
D) inflation.
Answer: A
33) Unemployment
generally________ during
recessions and________ during
expansions.
A) falls; rises.
B) falls; falls.
C) rises; falls.
D) rises; rises.
Answer: C
34) Which of the following
statements is FALSE?
A) The rate of change in
economic activity is used to
assess whether an economy is
expanding or contracting.
B) Short- term ups and downs
in the economy are known as
business cycles.
C) During a recession, output
and employment are falling.
D) Business cycles are always
symmetric the length of an
expansion is the same as the
length of a contraction.
Answer: D
2 True/False
1) Macroeconomics is
concerned with inflation or
deflation, output growth and
unemployment.
Answer: TRUE
2) Macroeconomics is
concerned with the market
price and equilibrium quantity
of each
good or service.
Answer: FALSE
3) The employment rate is the
number of people employed
divided by number of
people in the labor force.
Answer: TRUE

Answer: B
13) Which of the following is
NOT counted in the GNP of the
United States?
A) The wage of a U.S. citizen
who works in a foreign country
for a foreign firm.
B) The interest earned by a
U.S. bank on loans to a
business firm located in Brazil.
C) The profit earned by a
restaurant located in the
United States but owned by a
Mexican company.
D) The value of services that
are produced by state and local
governments in the United
States.
Answer: C
15) Profits earned in the United
States by foreign-owned
companies are included in
A) the U.S. GDP but not GNP.
B) neither the U.S. GDP nor
GNP.
C) the U.S. GNP but not GDP.
D) both the U.S. GDP and GNP.
Answer: A
17) The GDP includes
A) the value of all intermediate
goods and services.
B) the value of all final goods
and services.
C) the value of both
intermediate and final goods
and services.
D) the value of all transactions.
Answer: B
18) Income Mexican citizens
earn in the U.S. counts in
A) U.S. GNP.
B) Mexican GNP.
C) Mexican GDP.
D) both U.S. and Mexican GDP.
Answer: B
2 True/False
1) GDP measures the total
income of everyone and the
total spending by everyone in
the economy.
Answer: FALSE
3) The income of U.S. citizens
working abroad counts in U.S.
GDP.
Answer: FALSE
4) Stock market transactions
are part of GNP.
Answer: FALSE
5) Value added is the
difference between the value
of good as they leave a stage
of production and cost of the
goods as they entered that
stage of production.
Answer: TRUE
1 Multiple Choice
1) The equation for GDP using
the expenditure approach is
A) GDP = C + I + G + EX - IM.
B) GDP = C + I + G + (IM - EX).
C) GDP = C + I + G + EX + IM.
D) GDP = C + I + G - EX - IM.
Answer: A
2) The single largest
expenditure component in GDP
is
A) government spending.
B) investment.
C) consumption.
D) net exports.
Answer: C

A) $0.7 billion.
B) $150 billion.
C) $175 billion.
D) $250 billion.
Answer: B
3) Exports equal
A) imports - net exports.
B) net exports + imports.
C) net exports - imports.
D) imports + (exports +
imports).
Answer: B
34) When calculating GDP,
exports are ________ and
imports are ________.
A) added; added
B) added; subtracted
C) subtracted; added
D) subtracted; subtracted
Answer: B
35) If the value of net exports
is negative, then
A) exports exceed imports.
B) imports exceed exports.
C) exports equal imports.
D) imports are zero.
Answer: B
37) What should be subtracted
from GDP to calculate national
income?
A) depreciation
B) indirect taxes
C) personal income taxes.
D) net factor payments to the
rest of the world
Answer: A
41) What type of tax affects
the amount of money you pay
for a product?
A) direct tax
B) income tax
C) indirect tax
D) all of the above
Answer: C
42) Depreciation is
A) subtracted from national
income to get GDP.
B) added to national income to
get GDP.
C) subtracted from GNP to get
NNP.
D) added to GNP to get NNP.
Answer: C
47) If receipts of factor income
from the rest of the world
exceed payments of factor
income to the rest of the
world, then
A) GDP is greater than GNP.
B) GDP equals GNP.
C) GNP equals NNP.
D) GNP is greater than GDP.
Answer: D
1 Multiple Choice
1) Nominal GDP measures the
value of all goods and services
A) in constant dollars.
B) in current dollars.
C) in fixed dollars.
D) without inflation.
Answer: B
2) Gross domestic product
measured in terms of the
prices of a fixed, or base, year
is
A) current GDP.
B) base GDP.
C) real GDP.
D) nominal GDP.
Answer: C
3) Nominal GDP is gross
domestic product measured
A) in the prices of a base year.
B) in current dollars.
C) at a constant output level
but at the base-year prices.
D) as the difference between
the current year s GDP and last
year s GDP.ʹ ʹ
Answer: B
4) Real GDP is gross domestic
product measured
A) at a constant output level
but at current prices.
B) in current dollars.
C) in the prices of a base year.
D) as the difference between
the current year s GDP and last
year s GDP.ʹ ʹ
Answer: C
5) If real GDP in 2007 using
2006 prices is lower than
nominal GDP of 2007, then
A) prices in 2007 are lower
than prices in 2006.
B) nominal GDP in 2007 equals
nominal GDP in 2006.
C) prices in 2007 are higher
than prices in 2006.
D) real GDP in 2007 is larger
than real GDP in 2006.
Answer: C
6) If real GDP in 2008 using
2007 prices is higher than
nominal GDP of 2008, then
A) prices in 2008 are lower
than prices in the base year.
B) nominal GDP in 2008 equals
nominal GDP in 2007.
C) prices in 2008 are higher
than prices in the base year.
D) real GDP in 2008 is larger
than real GDP in 2007.
Answer: A

D) the number of people

employed divided by the labor
force.
Answer: C
11) Jake retired from the police
force. He started working an
hour or two a day at a paid job
in
city s courthouse. Jake isʹ
A) employed.
B) in the labor force.
C) unemployed.
D) not in the labor force.
Answer: A
12) Diane lost her job and
immediately started looking for
another job. As a result the
A) unemployment rate
increases.
B) labor force increases.
C) labor force decreases.
D) unemployment rate remains
constant.
Answer: A
Refer to the information
provided in Table 7.1 below to
answer the questions that
follow.
Table 7.1
Employed 14,000 people
Unemployed 3,000 people
Not in the Labor Force 4,000
people
13) Refer to Table 7.1. The
labor force equals
A) 14,000 people.
B) 17,000 people.
C) 18,000 people.
D) 21,000 people.
Answer: B
14) Refer to Table 7.1. The
unemployment rate is
A) 17.6%.
B) 16.7%.
C) 14.3%.
D) 25.0%.
Answer: A
15) Refer to Table 7.1. The
labor-force participation rate is
A) 75.0%.
B) 66.7%.
C) 77.8%.
D) 80.9%.
Answer: D
16) Refer to Table 7.1. The
employment rate is
A) 85.7%.
B) 83.3%.
C) 82.4%.
D) 75.0%.
Answer: C
Answer: D
6) Inflation is an increase in
A) the price of one item.
B) the overall price level.
C) the average income level.
D) real gross national product.
Answer: B
7) An increase in the overall
price level is
A) inflation.
B) deflation.
C) a price index.
D) a recession.
Answer: A
8) Deflation is a decrease in
A) the price of one item.
B) the overall price level.
C) the average income level.
D) real gross national product.
Answer: B
9) An increase in the overall
price level that continues over
a significant period of time is
A) high inflation.
B) sustained recovery.
C) sustained inflation.
D) super inflation.
Answer: C
10) A price index is
A) a measurement showing
how the average price of a
bundle of goods changes over
time.
B) a measurement showing the
cost of a bundle of goods at a
point in time.
C) a sustained increase in the
overall price level.
D) a decrease in the overall
price level.
Answer: A
Answer: B
12) Refer to Table 7.3. If 2006
is the base year, the price
index in 2005 is
A) 96.0.
B) 104.0.
C) 111.9.
D) 89.3.
Answer: D
13) Refer to Table 7.3. If 2006
is the base year, the price
index in 2007 is
A) 93.9.
B) 106.1.
C) 94.2.
D) 105.8.
Answer: B
14) Refer to Table 7.3 If 2006 is
the base year, the price index
in 2008 is
A) 81.2. B) 118.8. C) 123.2.
D) 86.8.
Answer: C
15) Refer to Table 7.3. If 2006
is the base year, the inflation
rate between 2006 and 2007 is
A) 3.9%.
B) 10.2%.
C) 7.4%.
D) 6.1%.
Answer: D
16) Refer to Table 7.3. If 2006
is the base year, the inflation
rate between 2006 and 2007 is
________%, and
the inflation rate between 2007
and 2008 is ________ %.
A) 7.4; 13.9
B) 6.1; 16.1
C) 3.9; 17.1
D) 10.2; 10.4
Answer: B
17) Refer to Table 7.3. The
lowest inflation rate is between
the years
A) 2007 and 2008.
B) 2006 and 2007.
C) 2005 and 2006.
D) cannot be determined from
the given information
Answer: B

8) Uncertainty about the future

is likely to
A) increase current spending.
B) have no impact on current
spending.
C) decrease current spending.
D) either increase or decrease
current spending.
Answer: C
9) Higher interest rates are
likely to
A) have no effect on consumer
spending or saving.
B) decrease consumer
spending and increase
consumer saving.
C) decrease both consumer
spending and consumer saving.
D) increase consumer spending
and decrease consumer saving.
Answer: B
10) Consumption is
A) positively related to
household income and wealth
and households expectations
about the future, but ʹ
negatively related to interest
rates.
B) negatively related to
household income and wealth,
interest rates, and households
expectations about the ʹ
future.
C) determined only by income.
D) positively related to
household income and wealth,
interest rates, and households
expectations about the ʹ
future.
Answer: A
11) In a closed economy with
no government, aggregate
expenditure is
A) consumption plus
investment.
B) saving plus investment.
C) consumption plus the MPC.
D) MPC + MPS.
Answer: A
12) If Wanda s income is
reduced to zero after she loses
her job, her consumption will
be ________ and her ʹ
saving will be ________.
A) less than zero; less than
zero
B) greater than zero; greater
than zero
C) less than zero; greater than
zero
D) greater than zero; less than
zero
Answer: D

D) shifts the saving function

downward.
Answer: D
20) Refer to Figure 8.1. An
increase in the MPC
A) makes the consumption
function flatter.
B) makes the saving function
flatter.
C) shifts the consumption
function upward.
D) shifts the saving function
downward.
Answer: B

A) 180.
B) 500.
C) 800.
D) cannot be determined from
the given information
Answer: B
41) If Zander s saving function
is of the form
ʹ S=-
150 + 0.5Y, his consumption
equals his income at an
income level of
A) 150.
B) 225.
C) 1,500.
D) 300.
Answer: D

46) Refer to Table 8.1.

Assuming society s ʹ MPC is
constant at an aggregate of
income of $300, aggregate
consumption would be ________.
A) $325.
B) $350.
C) $305.
D) $425.
Answer: B

A) $0
B) $20
C) $55
D) $150
Answer: B

A) -$10 billion.
B) $140 billion.
C) -$20 billion.
D) $70 billion.
Answer: C
7) Assume that in Jabara,
planned investment is $30
billion, but actual investment is
$45 billion.
Unplanned inventory
investment is
A) $75 billion.
B) -$15 billion.
C) $15 billion.
D) -$75 billion.
Answer: C
8) If unplanned business
investment is $20 million and
planned investment is $20
million, then
actual investment is
A) $20 million.
B) $40 million.
C) -$20 million.
D) $200 million.
Answer: B
9) In 2006 Happyland s
planned investment was $90
billion and its actual
investment was $140ʹ
billion. In 2006 Happyland s
unplanned inventory change
wasʹ
A) -$50 billion.
B) -$115 billion.
C) $50 billion.
D) $230 billion.
Answer: C
10) If planned investment
exceeds actual investment,
A) there will be an
accumulation of inventories.
B) there will be no change in
inventories.
C) there will be a decline in
inventories.
D) none of the above
Answer: C
11) If Inventory investment is
higher than firms planned,
A) actual and planned
investment are equal.
B) actual investment is less
than planned investment.
C) actual investment is greater
than planned investment.
D) actual investment must be
negative.
Answer: C
11) Refer to Table 8.3. The
equilibrium level of aggregate
output equals
A) $400 billion.
B) $600 billion.
C) $800 billion.
D) $1,000 billion.
Answer: D
12) Refer to Table 8.3. Which of
the following statements is
FALSE?
A) At output levels greater than
$800 billion, there is a positive
unplanned inventory change.
B) If aggregate output equals
$1000 billion, then aggregate
saving equals $100.
C) The MPC for this economy
is .75.
D) At an output level of $400
billion, there is a $150 billion
unplanned inventory decrease.
Answer: A
13) Refer to Table 8.3. Planned
saving equals planned
investment at an aggregate
output level
A) of $1000 billion.
B) of $600 billion.
C) of $800 billion.
D) that cannot be determined
from this information.
Answer: A
14) Refer to Table 8.3. Planned
investment equals actual
investment at
A) all income levels.
B) all income levels above
$600 billion.
C) all income levels below $600
billion.
D) $1000 billion.
Answer: D
23) Refer to Table 8.4. Planned
investment equals actual
investment at
A) all income levels.
B) all income levels above
$6,000 million.
C) all income levels below
$6,000 million
D) an income level of $6,000
million.
Answer: D
24) If C = 100 + .8Y and I = 50,
then the equilibrium level of
income is
A) 600.
B) 375.
C) 187.5.
D) 750.
Answer: D
25) If C = 500 + .9Y and I =
400, then the equilibrium level
of income is
A) 900.
B) 1,800.
C) 1,000.
D) 9,000.
Answer: D
26) If S = -200 + 0.2Y and I =
100, then the equilibrium level
of income is
A) 3,000.
B) 1,500.
C) 4,000.
D) 1,200.
Answer: B
27) If C = 1,500 + .75Y and I =
500, then planned saving
equals planned investment at
aggregate
output level of
A) 8,000.
B) 20,000.
C) 2,666.67.
D) 10,000.
Answer: A

28) Refer to Figure 8.8. What is

the equation for the aggregate
expenditure function (AE)?
A) AE = 200 + .5Y.
B) AE = 150 + .25Y.
C) AE = 200 + .8Y.
D) AE = 350 + .6Y.
Answer: B
29) Refer to Figure 8.8.
Equilibrium output equals
A) 100.
B) 200.
C) 150.
D) 300.
Answer: B
30) Refer to Figure 8.8. At
aggregate output level $300
million, there is a
A) $75 million unplanned
increase in inventories.
B) $75 million unplanned
decrease in inventories.
C) $100 million decrease in
inventories.
D) $100 million increase in
inventories.
Answer: A
31) Refer to Figure 8.8. At
aggregate output level $100
million, there is a
A) $75 million unplanned
increase in inventories.
B) $75 million unplanned
decrease in inventories.
C) $100 million decrease in
inventories.
D) $100 million increase in
inventories.
Answer: B
32) Refer to Figure 8.8. How
will equilibrium aggregate
expenditure and equilibrium
aggregateoutput
change as a result of a
decrease in investment by $20
million?
A) AE line shifts down,
increasing equilibrium output
and equilibrium expenditure.
B) AE line shifts up, increasing
equilibrium output and
equilibrium expenditure.
C) AE line shifts down,
decreasing equilibrium output
and equilibrium expenditure.
D) AE line shifts down,
increasing equilibrium output
and decreasing equilibrium
expenditure.
Answer: C
33) Refer to Figure 8.8.
Leakages are greater than
injections at an aggregate
output level of
A) $300 million.
B) $100 million.
C) $200 million.
D) cannot be determined from
the figure
Answer: A
2 True/False
1) When aggregate
expenditure is greater than
aggregate output, there will be
an unplanned
build up of inventories.
Answer: FALSE
2) When there is an unplanned
draw down of inventories, firms
will increase production.
Answer: TRUE
3) Actual investment equals
planned investment plus
unplanned changes in
inventories.
Answer: TRUE
4) When the economy is in
equilibrium, savings equals
planned investment.
Answer: TRUE
5) If aggregate expenditure
decreases, then equilibrium
output increases.
Answer: FALSE
6) Assuming there is no
government or foreign sector,
the economy will be in
equilibrium if, and
only if, planned investment
equals actual investment.
Answer: TRUE
8.4 The Multiplier
1 Multiple Choice
1) The ratio of the change in
the equilibrium level of output
to a change in some
autonomous variable is the
A) elasticity coefficient.
B) multiplier.
C) automatic stabilizer.
D) marginal propensity of the
autonomous variable.
Answer: B
9) Assuming there is no
government or foreign sector,
the formula for the multiplier is
A) 1/(1 - MPC).
B) 1/MPC.
C) 1/(1 + MPC).
D) 1 - MPC.
Answer: A
10) Assuming there is no
government or foreign sector,
if the multiplier is 10, the MPC
is
A) 0.9.
B) 0.8.
C) 0.5.
D) 0.1.
Answer: A
11) Assume there is no
government or foreign sector.
If the MPS is .05, the multiplier
is
A) 0.95.
B) 20.
C) 10.
D) 50.
Answer: B
) Assume there is no
government or foreign sector.
If the multiplier is 10, a $10
billion increase
in planned investment will
cause aggregate output to
increase by
A) $1 billion.
B) $5 billion.
C) $10 billion.
D) $100 billion.
Answer: D
13) Assume there is no
government or foreign sector.
If the MPS is 0.2, a $40 billion
decrease in planned
investment will cause
aggregate output to decrease
by
A) $20 billion.
B) $50 billion.
C) $80 billion.
D) $200 billion.
Answer: D
14) Assume there is no
government or foreign sector.
If the multiplier is 4, a $20
billion increase in
investment will cause
aggregate output to increase
by
A) $5 billion.
B) $20 billion.
C) $40 billion.
D) $80 billion.
Answer: D

2 True/False
1) The larger the MPC, the
smaller the multiplier.
Answer: FALSE
2) The smaller the MPS, the
larger the multiplier.
Answer: TRUE
3) If the MPC is .75, then the
multiplier is 4.
Answer: TRUE
4) If the MPS is .1, then the
multiplier is 10.
Answer: TRUE
5) An increase in the MPC,
reduces the multiplier.
Answer: FALSE