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Chapter 7 The Macroeconomy: Unemployment, Inflation, and Deflation 79
26) The nominal rate of interest is
A) the interest rate observed in today s market.
B) the interest rate observed in the market minus the inflation premium.
C) not influenced by inflation.
D) a value that depends upon the stock market.
27) The real rate of interest is
A) the interest rate observed in the market.
B) the interest rate observed in the market minus the anticipated inflation rate.
C) not influenced by inflation.
D) a value that depends upon the stock market.
28) The real rate of interest equals 5% and the expected rate of inflation equals 2%. The nominal rate
of interest equals
A) 2%. B) 3%. C) 5%. D) 7%.
29) The real rate of interest equals 8%, and the expected rate of inflation equals 2%. The nominal
rate of interest is
A) 2%. B) 6%. C) 8%. D) 10%.
30) Debtors gain and creditors lose when
A) the anticipated rate of inflation is greater than the actual rate of inflation.
B) the anticipated rate of inflation is less than the actual rate of inflation.
C) the anticipated rate of inflation is the same as the unanticipated rate of inflation.
D) the unanticipated rate of inflation is zero.
31) The menu cost of inflation involves
A) the mistakes producers make in adjusting prices.
B) the mistake people make when they do not know the actual rate of inflation.
C) cost of living adjustments.
D) the costs associated with changing price lists.
32) Unanticipated positive inflation
A) hurts everyone. B) hurts creditors.
C) hurts debtors. D)
b
enefits banks.
33) A COLA is
A) unanticipated positive inflation.
B) unanticipated negative inflation.
C) the cost associated with recalculating prices and printing new price lists when there is
inflation.
D) an automatic increase in wages that takes into account increases in the price level.
34) A clause in a contract that automatically increases wages to account for increases in the price
level is
A) the GDP deflation. B) the PCE index.
C) a COLA. D) the real rate of interest.
35) The purpose of COLAs is to protect
A) lenders . B)
b
orrowers. C) workers. D)
b
usinesses.
36) Which one of the following is true?
A) The nominal rate of interest is the real rate plus the anticipated rate of inflation.
B) The real rate of interest is the nominal rate plus the anticipated rate of inflation.
C) Increases in anticipated inflation increase the real interest rate.
D) Increases in the CPI increase the real interest rate.
37) The real rate of interest can be defined as the
A) nominal interest rate less the anticipated rate of inflation.
B) anticipated rate of inflation less the nominal interest rate.
C) the market rate of interest expressed in today s dollars.
D) nominal rate of interest less the unanticipated rate of inflation.
38) Empirical evidence shows that the nominal interest rate typically rises at the same time the
inflation rate increases. What does this suggest?
A) The real rate of interest is zero.
B) Increases in the current inflation rate lead borrowers and lenders to expect that inflation in
the future will be higher than previously thought.
C) Interest rate changes are the main component of the CPI.
D) Interest rate changes are the main component of the GDP deflator.
39) Which one of the following would benefit financially from unanticipated inflation?
A) a borrower whose loan has a fixed nominal interest rate
B) a borrower with an adjustable rate mortgage
C) a bank that has made loans at a fixed nominal interest rate
D) a firm whose workers are covered by a COLA agreement
40) Suppose the rate of inflation unexpectedly decreases from 7% to 4%. Which one of the
following would most likely benefit from this unexpected reduction in the rate of inflation?
A) creditors.
B) a borrower whose loan has a fixed nominal interest rate.
C) debtors.
D) workers who are covered by a COLA agreement.
41) Unanticipated inflation benefits
A) people or businesses who owe funds.
B) people or businesses who lend funds.
C) people who live on a fixed income.
D) people with CDs (certificates of deposits) in the bank.
42) Who is likely to be helped by unanticipated inflation?
A) lenders B)
b
orrowers C) all consumers D) all producers
43) Why is there a resource cost associated with inflation?
A)
b
ecause unemployment increases when there is inflation
B)
b
ecause most workers end up working fewer hours during periods of inflation
C)
b
ecause consumers, workers, and firms devote resources to protecting themselves from
the financial costs of inflation
D)
b
ecause the existence of inflation discourages people from placing their savings in
interest bearing accounts, where it is needed to fund capital investment
44) If a bank advertises 3 percent interest for a checking account and the anticipated rate of inflation
is 3.5 percent,
A) the real rate of interest earned on the account is 0.5 percent.
B) the real rate of interest earned on the account is 0.5 percent.
C) the real rate of interest earned on the account is 6.5 percent.
D) the real rate of interest earned on the account is 3.25 percent.
45) How much should a bank charge for a loan, if the anticipated inflation rate is 4 percent, and the
bank wants to earn 3 percent on this $1,000,000 loan?
A) $30,000 B) $40,000 C) 7 percent D) 1 percent
46) If your income rises at 5 percent and inflation has risen at 2 percent, then the purchasing power
of your income has
A) eroded. B) stayed the same.
C) fallen, but will increase due to indexing. D) increased.
47) If you anticipate that the inflation rate is going to rise from three percent to 10 percent next year
, you should
A) save your funds at a fixed rate of interest.
B)
b
orrow funds at a fixed rate of interest.
C) keep your funds in your sock drawer.
D) wait to buy a house until next year.
48) The real interest rate is
A) the nominal interest rate plus the anticipated inflation rate.
B) the nominal interest rate minus the anticipated inflation rate.
C) the nominal interest rate plus a COLA.
D) the nominal interest rate plus the GDP deflator.
49) If the nominal interest rate is 9 percent and the anticipated inflation rate is 4 percent, then
A) the real interest rate is 5 percent. B) the real interest rate is 13 percent.
C) the real interest rate is 5 percent. D) the real interest rate is 2.25 percent.
50) During an unanticipated inflation
A) creditors are helped and debtors are hurt.
B) creditors are hurt and debtors are helped.
C)
b
oth creditors and debtors are hurt.
D)
b
oth creditors and debtors are helped.
51) An automatic increase in a wage rate found in some contracts is known as a
A) change of labor agreement. B) cost of labor arrangement.
C) cost of living adjustment. D) charge for living amendment.
52) How is inflation related to interest rates?
53) What are the costs to society of inflation? Who is harmed by inflation and who benefits?
7.6 Changing Inflation and Unemployment: Business Fluctuations
1) The term business fluctuations refers to
A) changes in overall business activity, as evidenced by changes in national income,
employment, and the price level.
B) changes in the general price level from inflation to deflation, or vice versa.
C) changes in the full employment level of economic activity.
D) changes in the value of the dollar.
2) In sequential order, the four phases of the business cycle are
A) trough, peak, expansion, contraction. B) peak, contraction, trough, expansion.
C) expansion, contraction, peak, trough. D) contraction, trough, peak, expansion.
3) The peak phase of the business cycle represents
A) a temporary maximum output level of Gross Domestic Product (GDP).
B) an increase in foreign investment.
C) a labor surplus.
D) falling prices.
4) When economy wide business activities are increasing, they are referred to as
A) contractions. B) expansions. C) anti cycles. D) corrections.
5) A recession may be defined as
A) a period during which the rate of growth of business activity is consistently less than its
long term trend.
B) an increase in real economic output from one period to the next.
C) no change in real economic output over a period of time.
D) no change in the dollar (money) value of economic output over a period of time.
6) All of the following are signals of a recession EXCEPT
A) a cyclical reduction in employment of labor.
B) a slight reduction in a currently high rate of growth in economic activity.
C) increasing unemployment.
D) a falling level of economic activity.
7) An economy recovering from a recession moves
A) up from its trough to a period of expansion.
B) up from its peak to a period of expansion.
C) down from its trough to a period of depression.
D) down from its peak to a period of expansion.
8) During a recession
A) incomes rise and employment decreases.
B) incomes fall and unemployment increases.
C) incomes fall and unemployment falls.
D) incomes rise and unemployment increases.
9) When economy wide business fluctuations are negative, they are referred to as
A) contractions/recessions. B)
b
ooms.
C) expansions. D) peaks.
10) Contractions are characterized by
A) increases in the rate of growth of economic activity.
B) an upward movement toward a peak in economic activity.
C) a downward movement toward a trough in economic activity.
D) a long period in which no cycles are observed in economic activity.
11) The business cycle phase that must come before the peak is a(n)
A) trough. B) expansion. C) recession. D) contraction.
12) When, over a sustained period of time, the growth of aggregate business activity falls below
what is considered the normal growth rate, the economy necessarily experiences
A) inflation. B) deflation. C) an expansion. D) a recession.
13) A period of time in which the overall business activity is rising at a rapid rate is known as
A) inflation. B) hyperinflation. C) an expansion. D) a contraction.
14) The official dating of recessions is done by
A) the President.
B) the Congress.
C) the National Bureau of Economic Research.
D) the Council of Economic Advisors.
15) An extremely severe recession is known as a
A) trough. B) peak. C) contraction. D) depression.
16) A period of time in which the overall pace of business activity is falling is known as
A) inflation. B) deflation. C) an expansion. D) a contraction.
17) A period in which the level of business is consistently less than its long term trend is known as
A) depression. B) recession. C)
b
usiness cycle. D) growth trend.
18) A period of time in which the overall pace of business activity is rising is known as
A) inflation. B) deflation. C) an expansion. D) a contraction.
19) The official dating of recessions is done by
A) the Council of Economic Advisors.
B) the National Bureau of Economic Research.
C) the Government Accounting Office.
D) the Secretary of the Treasury.
20) The long run trend in business activity is
A) downward.
B) constant.
C) upward.
D) such that it cannot be described as a trend.
21) Business fluctuations
A) influence unemployment but not inflation.
B) influence inflation but not unemployment.
C) can influence inflation and unemployment.
D) have no influence on inflation and unemployment.
22) Which of the following would be considered an external shock?
A) A decline in tax revenues during a recession
B) A recession
C) A depression
D) A war
23) Which of the following is a true statement?
A) All recessions are due to external shocks.
B) Ultimately, no recession has been due to an external shock.
C) There have been recessions that cannot be explained by external shocks.
D) All recessions and all expansions are due to external shocks.
24) Refer to the above figure. Point B is known as
A) a peak. B) a trough. C) an expansion. D) a contraction.
25) Refer to the above figure. Point C is known as
A) a peak. B) a trough. C) an expansion. D) a contraction.
26) Refer to the above figure. The points between A and B are known as
A) a peak. B) a trough. C) an expansion. D) a contraction.
27) Refer to the above figure. The points between B and C are known as
A) a peak. B) a trough. C) an expansion. D) a contraction.
28) Refer to the above figure. A recession is best described as
A) the upward linear line. B) the period between Point B and Point C.
C) the period between Point A and Point B. D) none of the above.
29) Refer to the above figure. At Point B, the actual unemployment rate
A) will decrease over time.
B) is negative.
C) tends to be higher than the natural unemployment rate.
D) tends to be lower than the natural unemployment rate.
30) Ups and downs in business activity are referred to as
A) ebb and flow. B) contractions.
C) variability. D)
b
usiness fluctuations.
31) Business fluctuations in the United States are
A) smooth and steady. B) predictable.
C) controllable. D) irregular and unpredictable.
32) Examples of external shocks are all of the following EXCEPT
A) war. B) drought.
C) oil shock. D) U. S. federal tax policies.
33) When the economy is experiencing a contraction, there is an increase in
A) frictional unemployment. B) structural unemployment.
C) seasonal unemployment. D) cyclical unemployment.
34) The trough of a contraction is
A) the point in time at which the level of national business activity reaches a minimum before
expanding again.
B) the point in time at which the level of national business activity reaches a maximum before
contracting again.
C) the rate at which the level of business activity is declining.
D) an external shock that causes economic activity to decline.
35) How has the pattern of fluctuations in overall U.S. business activity changed since World War
II?
A) It has become less volatile. B) Expansions have been eliminated.
C) Contractions have been eliminated. D) Recessions have been eliminated.
36) Changes in business activity are
A) referred to as business fluctuations.
B) referred to as the ebb and flow of business.
C) always undesirable.
D) caused by the changing seasons every year.
37) A decline in business activity is called
A) a recession. B) a trough. C) an expansion. D) a peak.
38) Which of the following would be a leading indicator?
A) the number of unemployment claims B) the real interest rate
C) personal income in the United States D) an increase in stock prices
39) Which of the following statements is correct?
A) The depth and the length of all business cycles are identical.
B) The depth and the length of all business cycles are different.
C) Business cycles are caused by seasonal unemployment changes.
D) Business cycles are caused by unanticipated inflation.
40) A severe and prolonged recession is called
A) a slump. B) a stagnation. C) a trough. D) a depression.
41) Historically speaking, business fluctuations in an economy were more commonly referred to as
A) inflationary pressures. B) economic growth.
C) the GDP deflator. D)
b
usiness cycles.
42) According to business activity charts for the last 100 years, the point of the highest business
activity in the United States occurred
A) during the 1920s bull market boom. B) during World War II.
C) during the Vietnam War. D) during the Clinton administration.
43) A business fluctuation when the pace of economic activity is slowing down is called
A) a reduction. B) a contraction. C) a depression. D) a slowdown.
44) Typically during a recession,
A) incomes fall, and unemployment falls.
B) incomes and unemployment rise.
C) incomes fall, and unemployment rises.
D) incomes increase, and unemployment falls.
45) Changes in leading indicators signal
A) the changes in the frictional and seasonal unemployment rate.
B) the changes that will occur in the economy.
C) the changes in the frictional unemployment rate and the changes in the inflation rate.
D) the changes in the market basket.
46) The National Bureau of Economic Research is
A) funded by Congress and evaluates the budget appropriations.
B) funded by the Federal Reserve Banks and analyzes the banking system.
C) a nonprofit organization and evaluates the business cycles.
D) a nonprofit organization and evaluates the U.S. monetary policy.
47) The period between the trough and the peak of a business fluctuation is called
A) the growth phase. B) the spreading out.
C) the development. D) the expansion.
48) Refer the above figure. Stage 1 of the economy is called
A) the top. B) the peak. C) the trend. D) the climax.
49) Refer the above figure. Stage 2 of the economy is called
A) a contraction. B) a peak. C) a trough. D) an expansion.
50) Refer to the above figure. Stage 3 of the economy is called
A) a development. B) a pit.
C) a trough. D) a hole.
51) Refer the above figure. Stage 4 of the economy is called
A) a maturity. B) a spreading out.
C) an expansion. D) a development.
52) A business fluctuation when the pace of business activity is speeding up is known as
A) a contraction. B) a trough. C) an expansion. D) a recession.
53) A war in the Middle East that disrupts U.S. economic activity is known as
A) an external shock. B) an expansion.
C) a demand shock. D) an internal shock.
54) What is the business cycle? How cyclical is it? What causes the business cycle?
