Chapter 09 – Business Cycles, Unemployment, and Inflation
100. In Year 1, the price level was 120 and the average nominal income was $30,000. In Year
2, the price level was 125 and the average nominal level of income was $32,000. What
happened to real income from Year 1 to Year 2?
101. If a person’s nominal income increases by 5% while the price level increases by 2%, then
that person’s real income:
102. A person’s real income will increase by 3% if her nominal income:
Chapter 09 – Business Cycles, Unemployment, and Inflation
103. Recently a teachers’ union argued that the standard of living of teachers working for the
school district was falling. The negotiating team for the school board replied that this was not
true because the teachers had received significant increases in nominal income through
collective bargaining. Could the union statement be correct?
104. If the price level increases by 15 percent while nominal income increases by 8 percent,
then in percentage terms real income would:
Chapter 09 – Business Cycles, Unemployment, and Inflation
105. For a person to keep his real income steady at a certain level from one year to the next,
his nominal income must:
106. The percentage change in one’s real income can be approximated by:
107. Unanticipated inflation arbitrarily:
Chapter 09 – Business Cycles, Unemployment, and Inflation
108. Unanticipated inflation tends to penalize:
109. Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If
unanticipated inflation occurs in the economy, then:
110. When unanticipated deflation occurs:
Chapter 09 – Business Cycles, Unemployment, and Inflation
111. Which of the following groups has traditionally benefited from unanticipated inflation?
112. A worker would be hurt least by inflation when the:
113. Which statement about inflation is correct?
Chapter 09 – Business Cycles, Unemployment, and Inflation
114. In what circumstances would lenders most benefit?
115. You are given the following information about the economy: (1) nominal interest = 8
percent; (2) real rate of interest = 6 percent. The inflation premium is:
116. With no inflation, a bank would be willing to lend a business firm $5 million at an
annual interest rate of 6%. But, if the rate of inflation was anticipated to be 4%, the bank
would most likely charge the firm an annual interest rate of:
Chapter 09 – Business Cycles, Unemployment, and Inflation
117. If the inflation premium is 3% and the real interest on a loan is 4%, then the nominal
interest rate is:
118. Which of the following statements is correct?
119. A cumulative wage-price spiral which produces a rapid and huge increase in the price
level can be characterized as:
Chapter 09 – Business Cycles, Unemployment, and Inflation
120. In the 1920s, Germany after the First World War experienced an economic condition
which can be best described as:
121. Cross-country studies that bolster the “zero inflation” view indicate that lower rates of
inflation are associated with:
122. What are the primary effects of cost-push inflation?
Chapter 09 – Business Cycles, Unemployment, and Inflation
123. What is the main problem with mild inflation according to some economists?
124. What is an advantage of mild inflation according to some economists?
125. What does research indicate about the effect volatility of stock-price averages on the
stability of the macroeconomy?
Chapter 09 – Business Cycles, Unemployment, and Inflation
126. When stock market bubbles burst, the following usually occur, except:
127. Which of the following statements is true?
128. A recession is defined as a situation where the average price level in the economy is
increasing.
Chapter 09 – Business Cycles, Unemployment, and Inflation
129. The duration of a recession measures the decline in real output during the recession.
130. If the total population is 175 million, the labor force is 100 million, and 89 million
workers are employed, then the unemployment rate is 11 percent.
131. Anyone who is not employed is classified as unemployed in the Bureau of Labor
Statistics data on the labor force.
132. Unemployment that is the result of deregulation, corporate downsizing, and the closure
of military bases is best categorized as frictional unemployment.
Chapter 09 – Business Cycles, Unemployment, and Inflation
133. Official unemployment statistics overstate unemployment because discouraged workers
who are not actively seeking work are counted as unemployed.
134. If the economy’s actual GDP is greater than its potential GDP, then there is high
unemployment in that economy.
135. The unemployment rate among teenagers tends to be lower than the unemployment rate
among adults.
136. If the CPI rises from 125 to 140 from one year to the next, then the rate of inflation is 15
percent.
Chapter 09 – Business Cycles, Unemployment, and Inflation
137. The percentage change in real income can be approximated by subtracting the percentage
change in the price level from the percentage change in nominal income.
138. Unanticipated inflation benefits creditors and savers.
139. Lenders will be willing to reduce the nominal interest rates on loans if the expected
inflation increases.
140. Deflation is when the inflation rate turns negative.
Chapter 09 – Business Cycles, Unemployment, and Inflation
141. Cost-push inflation increases real output and employment.
142. Proponents of zero inflation argue that even mild inflation (1 to 3 percent) reduces the
economy’s real output.
143. Economists who are willing to accept mild inflation consider it to be a necessary by-
product of high and growing spending that produces high levels of output, full employment,
and economic growth.
144. Demand-pull inflation is usually accompanied by low unemployment and higher real
output.