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Economics: Business Cycles and Inflation - Prof. Chiayang J. Hueng, Study notes of Introduction to Macroeconomics

Material Type: Notes; Professor: Hueng; Class: Principles Of Macroeconomics; Subject: Economics; University: Western Michigan University; Term: Unknown 2009;

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ECON202 Chapter5ReviewSheets ProfessorC.JamesHueng
1) Abusinesscycleisthe
A) patternofshort-runupwardanddownwardmovementsinproductionandjobs.
B) increaseinconsumerspendingthataccompaniesanincreaseindisposableincome.
C) cyclicalchangeinthenationʹsbalanceoftrade.
D) cyclicalmovementintheinterestrates.
2) Whichofthefollowingarepartsofthebusinesscycle?
A) peakandpotentialGDP B) realGDPandpotentialGDP
C) recessionandexpansion D) inflationandrecessio
n
3) Apopularworkingdefinitionofarecessionisaperiodwith
A) negativegrowthrateinrealGDPthatlastsatleastonequarter.
B) positivegrowthrateinrealGDPthatlastsatleastonequarter.
C) positivegrowthrateinrealGDPthatlastsatleasttwoquarters.
D) negativegrowthrateinrealGDPthatlastsatleasttwoquarters.
4) Thebottomorlowpointofarecessionjustbeforeanexpansionbeginsiscalled
A) thetrough. B) thecontraction. C) thepeak. D) thepits.
5) Anexpansionoccurswhenproductionofgoodsandservicesis
A) increasing. B) decreasing.
C) atacyclicalpeak. D) atacyclicaltrough.
6) SupposethecountryofDingoexperiencedaneconomictroughinJanuary2004.Wecanconcludethat
A) realGDPinDingowasincreasinginJanuary2004.
B) anexpansionoccurredafterJanuary2004.
C) Dingodidnotexperiencearecessionin2003.
D) DingoʹspotentialGDPfellin2004.
7) Anobserveroftheeconomynoticesthatoverthelastninemonthstheunemploymentratehasincreased
from5.6percentto8.7percent.Duringthesametimetherateofgrowthinrealgrossdomesticproducthas
becomenegative.Fromthisinformationwemightconcludethat
A) inflationisprobablyrampantinthiseconomy.
B) arecessionisoccurringinthiseconomy.
C) anexpansionaryphaseofthebusinesscycleisinprocess.
D) apeakinthebusinesscyclewillsoonbereached.
8) Apeakisthe
A) lowerturningpointofabusinesscyclewhenanexpansionends.
B) lowerturningpointofabusinesscyclewhenarecessionends.
C) upperturningpointofabusinesscyclewhenanexpansionends.
D) upperturningpointofabusinesscyclewhenarecessionends.
9) Betweenthetroughandthepeakofthebusinesscycletheeconomy
A) experiencesrisingunemployment. B) isinaneconomicexpansion.
C) experiencesfallingrealGDP. D) isinaneconomicrecession.
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ECON 202 Chapter 5 Review Sheets Professor C. James Hueng

  1. A business cycle is the A) pattern of short-run upward and downward movements in production and jobs. B) increase in consumer spending that accompanies an increase in disposable income. C) cyclical change in the nationʹs balance of trade. D) cyclical movement in the interest rates.

  2. Which of the following are parts of the business cycle? A) peak and potential GDP B) real GDP and potential GDP C) recession and expansion D) inflation and recession

  3. A popular working definition of a recession is a period with A) negative growth rate in real GDP that lasts at least one quarter. B) positive growth rate in real GDP that lasts at least one quarter. C) positive growth rate in real GDP that lasts at least two quarters. D) negative growth rate in real GDP that lasts at least two quarters.

  4. The bottom or low point of a recession just before an expansion begins is called A) the trough. B) the contraction. C) the peak. D) the pits.

  5. An expansion occurs when production of goods and services is A) increasing. B) decreasing. C) at a cyclical peak. D) at a cyclical trough.

  6. Suppose the country of Dingo experienced an economic trough in January 2004. We can conclude that A) real GDP in Dingo was increasing in January 2004. B) an expansion occurred after January 2004. C) Dingo did not experience a recession in 2003. D) Dingoʹs potential GDP fell in 2004.

  7. An observer of the economy notices that over the last nine months the unemployment rate has increased from 5.6 percent to 8.7 percent. During the same time the rate of growth in real gross domestic product has become negative. From this information we might conclude that A) inflation is probably rampant in this economy. B) a recession is occurring in this economy. C) an expansionary phase of the business cycle is in process. D) a peak in the business cycle will soon be reached.

  8. A peak is the A) lower turning point of a business cycle when an expansion ends. B) lower turning point of a business cycle when a recession ends. C) upper turning point of a business cycle when an expansion ends. D) upper turning point of a business cycle when a recession ends.

  9. Between the trough and the peak of the business cycle the economy A) experiences rising unemployment. B) is in an economic expansion. C) experiences falling real GDP. D) is in an economic recession.

  1. Recessions A) begin at the trough of the business cycle. B) are an economy-wide decrease in the level of economic activity. C) end at the peak of the business cycle. D) have not occurred in the United States after 1963.

  2. Which of the following is a correct statement about business cycles? A) Expansions follow peaks. B) Expansions tend to last longer than recessions. C) The increase in real GDP from trough to peak is typically less than the decrease in real GDP from peak to trough. D) To count as a period of recession, real GDP must decrease for at least 1 year.

  3. In the above figure, a recession begins at point ________ and an expansion begins at point ________. A) a ; b B) b ; c C) b ; a D) d ; c

  4. In the above figure, a trough is at point ________ and a peak is at point ________. A) a ; b B) b ; c C) b ; a D) d ; c

  5. Which is the proper order for the business cycle? A) peak, recession, trough, expansion B) peak, trough, expansion, recession C) peak, expansion, trough, recession D) peak, recession, expansion, trough

  6. Suppose that real GDP rises in all four quarters of 2005; thus 2005 would definitely be a year A) of expansion. B) with a business cycle peak. C) of recession. D) with a business cycle trough.

  7. If the unemployment rate falls, the labor force participation rate increases, and the employment-to-population ratio increases, then the economy is most likely in ________. A) an expansion B) a recession C) a golden age D) a trough

  1. If the CPI was 121.5 at the end of 2004 and 138.3 at the end of 2005, the inflation rate over these two years was A) 10.2 percent. B) 13.8 percent. C) 12.2 percent. D) 16.8 percent.

  2. If the CPI was 122.3 at the end of 2004 and 124.5 at the end of 2005, the inflation rate over these two years was A) 1.8 percent. B) 2.5 percent. C) 22.5 percent. D) 18.0 percent.

  3. If the CPI was 132.5 at the end of 2004 and 137.5 at the end of 2005, the inflation rate over these two years was A) 3.6 percent. B) 3.8 percent. C) 5.0 percent. D) None of the above answers is correct.

  4. In 2004 the Consumer Price Index was equal to 163.8 and in 2005 it was equal to 157.5. What is the inflation rate over this time period? A) 6.3 percent B) 4.0 percent C) 3.85 percent D) 10.1 percent

  5. The Consumer Price Index for country Beta in 2003 was equal to 203.5 and for 2004 it was 199.6. On the basis of this information which of the following statements is true? A) Beta experienced an inflation rate of 3.9 percent. B) Beta experienced a deflation rate of 3.9 percent. C) Beta experienced an inflation rate of 1.9 percent. D) Beta experienced a deflation rate of 1.9 percent.

  6. The biases in the CPI include the A) old goods, unemployment, and inflation biases. B) new goods, quality change, and substitution biases. C) old goods, new goods, and quality change biases. D) substitution, new goods, and old goods biases.

  7. The biases in the CPI are A) not important since they are so small. B) important only to economists, not the real world. C) important since they effect nearly 1/3 of federal government spending. D) not important although they are large.

  8. Because of the biases in calculating the CPI, actual inflation is A) accurately measured. B) less than the measured inflation rate by about 1 percent per year. C) more than the measured inflation rate by about 1 percent per year. D) more than the measured inflation rate by about 1 percent per month.

  9. Price indexes can overstate inflation because they A) omit some quality improvements. B) do not contain the correct collection of goods purchased by consumers. C) do not contain the prices of foreign goods. D) do not contain the prices of services.

  1. The technique currently used to calculate the CPI implicitly assumes that over time consumers buy A) relatively more of goods whose relative prices are rising. B) relatively less of goods whose relative prices are rising. C) the same relative quantities of goods as in a base year. D) goods and services whose quality improves at the rate of growth of real income.

  2. Substitution bias in the CPI refers to the fact that the CPI A) takes into account the substitution of goods by consumers when relative prices change. B) takes no account of the substitution of goods by consumers when relative prices change. C) substitutes quality changes whenever they occur without taking account of the cost of the quality changes. D) substitutes relative prices for absolute prices of goods.

  3. The commodity substitution bias is that A) consumers substitute high-quality goods for low-quality goods. B) government spending is a good substitute for investment expenditures. C) national saving and foreign borrowing are interchangeable. D) consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price falls.

  4. If a new and better good replaced an older and less expensive good, then the price level measured by the CPI ________. A) is lower than the actual price level B) is higher than the actual price level C) might be either higher or lower than the actual price D) is the same as the actual price level because it measures the prices of the actual goods.

  5. The CPI basket contains 400 oranges and 800 pens. In the base year, the price of an orange is $1.00 and the price of a pen is $0.75. This year, urban consumers each buy 300 oranges at $2.00 each and 850 pens at $1.00 each. The CPI this year is ________. A) 1.60 B) 62.5 C) 160 D) 140

  6. If the number of people unemployed and the number of people in the labor force grow at the same rate, then the ________. A) labor force participation rate will decrease B) unemployment rate will increase C) unemployment rate will stay the same D) labor force participation rate will increase

Item Quantity Price Quantity Price Books 10 $30 8 $ Pens 20 $1 15 $

  1. In 2004, consumers in Dexter consumed only books and pens. The prices and quantities for 2004 and 2005 are listed in the table above. The reference base period for Dexterʹs CPI is 2004. What is the cost of the CPI basket in 2004? A) $430 B) $335 C) $320 D) $
  1. The unemployment rate is calculated as 100 times A) [(labor force) ÷ (population)]. B) [(unemployment) ÷ (population)]. C) [(unemployment) ÷ (labor force)]. D) [(labor force) ÷ (unemployment)].

  2. Suppose the population of Tiny Town is 100 people and the working age population is 70. If 10 of these people are unemployed, the unemployment rate in Tiny Town is A) 10 percent. B) 10/70 × 100. C) 10/80 × 100. D) There is not enough information provided to calculate the unemployment rate.

  3. Based on the following data for the country of Tiny Town, the unemployment rate equals: Population = 100 Labor force = 80 Number of employed persons = 70 Number of discouraged workers = 5 A) 10/100 × 100. B) 10/80 × 100. C) 15/80 × 100. D) 5/70 × 100.

  4. Which of the following will decrease the unemployment rate? A) Discouraged workers leave the labor force. B) More women enter the labor force and seek jobs. C) Young people graduate from college and start to look for their first full-time job. D) None of the above because they all increase or do not change the unemployment rate.

Person A Now that the kids are in school for a full day, this person is looking for work and has interviewed for three jobs during the past two weeks. Person B This person has been laid off from a job but expects to be called back as soon as the economy improves. Person C This person has just graduated from college and will start a new job in three weeks. In the meantime this person will tour the great American beaches. Person D This person was laid off last year when new equipment was installed at the plant, reducing the number of workers needed. Shortly after being laid off, this person looked for a new job, was unable to find one, and then stopped looking for work.

  1. The above table shows answers given by people interviewed in a government survey of households. Which individuals are considered to be a part of the labor force? A) C and D B) B, C, and D C) A, C, and D D) A, B, and C

  2. The above table shows answers given by people interviewed in a government survey of households. Which individuals are considered unemployed? A) A, B, and C B) B, C, and D C) A, C, and D D) C and D

  1. The above table shows answers given by people interviewed in a government survey of households. Which person is a discouraged worker? A) A B) B C) C D) D

Total population (millions)

Currently employed (millions)

Not working and looking for work (millions)

Want to work but no longer looking for work (millions) 80 40 2 4

  1. In the table above, the size of the labor force is A) 80 million. B) 46 million. C) 42 million. D) 40 million.

  2. In the table above, the number of people officially unemployed is ________. A) 40 million B) 6 million C) 4 million D) 2 million

  3. In the table above, the unemployment rate is A) 50 percent. B) 15 percent. C) 10 percent. D) 5 percent.

  4. The labor force participation rate is calculated as the A) labor force divided by the number of persons employed then multiplied by 100. B) number of persons unemployed divided by the labor force then multiplied by 100. C) labor force divided by the unemployment rate then multiplied by 100. D) labor force divided by the working age population then multiplied by 100.

  5. Suppose the labor force in Tiny Town is 100 people. If the ________ in Tiny Town is 150 people, the labor force participation rate equals 100 times ________. A) working age population; 100/150 B) working age population; 100/ C) number of employed persons; 100/250 D) number of employed persons; 100/

  6. Which labor market statistic tends rise during recessions and fall during expansions? A) the unemployment rate B) the labor-force participation rate C) the employment-to-population ratio D) aggregate hours

  7. Suppose the number of people employed is 25 million and the number of people in the labor force is 75 million. What is the employment-to-population ratio? A) 33 percent B) 25 percent C) 75 percent D) There is not enough information given to answer the question.

Component Number^ of^ people (millions) Total population 246 Working-age population 207 Labor force 139 Employed 133 Unemployed 6

  1. Using the information in the above table, the unemployment rate is A) 4.5 percent. B) 4.3 percent. C) 2.8 percent. D) 6.0 percent.

  2. The labor force participation rate is A) 67.1 percent. B) 64.0 percent. C) 95.7 percent. D) 56 percent.

  3. The employment-to-population ratio is A) 67 percent. B) 64 percent. C) 50 percent. D) 62 percent.

  4. Which of the following best measures the total amount of labor used to produce GDP? A) the total number of people employed B) the total number of people employed full time C) the total hours worked by full time employees D) the total hours worked by full and part time employees

  5. If aggregate hours worked grows more slowly than the number of people employed then A) people are working fewer hours on average. B) people are working more hours on average. C) there must be fewer part time workers. D) None of the above is correct because aggregate hours cannot grow more slowly than the number of people employed.

  6. The money wage rate equals $10 per hour. If the price level rises and the money wage does not change, A) the real wage decreases. B) the quantity of goods and services that an hour of work can buy decreases. C) the real wage increases. D) Both answers A and B are correct.

  7. Who of the following is unemployed? A) Rene, a retired chemist B) Homer, a full-time student at a vocational school C) Kim, a worker on strike from her company for a week D) Glenn, a student who just graduated from college last week and is currently looking for a job

  8. The percentage of the people of working age who have jobs is called the ________. A) labor force B) employment-to-population ratio C) inverse of the unemployment rate D) employment-to-working-age-population ratio

  1. The ________ fluctuates more than does the ________. A) labor force participation rate; employment-to-population ratio B) labor force participation rate; unemployment rate C) employment-to-population ratio; labor force participation rate D) employment-to-population ratio; unemployment rate

  2. In an economy, 19 million people are employed and 3 million are unemployed, but 2 million part-time workers would prefer full-time work. In addition, there are 2 million discouraged workers. How many people are in the labor force? A) 23 million B) 19 million C) 21 million D) 22 million

  3. In an economy, 23 million people are employed and 2 million are unemployed, but 5 million part-time workers would prefer full-time work. What is the unemployment rate? A) 23.2 percent B) 6.7 percent C) 8 percent D) 25 percent

  4. If the people who take early retirement are not counted in the working-age population, then A) the unemployment rate would be lower. B) the labor force participation rate would be less. C) the unemployment rate would be higher. D) the labor force participation rate would be higher.

  5. Most unemployed people are unemployed because they are A) job leavers. B) job losers. C) reentrants into the labor force. D) new entrants into the labor force.

  6. The smallest and most stable source of unemployment is A) job leavers. B) job losers. C) reentrants into the labor force. D) new entrants into the labor force.

  7. The duration of unemployment is the length of time a person A) is employed while looking for work. B) is unemployed while looking for work. C) is unemployed even though that person is not looking for work. D) spends working in a job.

  8. Frictional unemployment A) includes discouraged workers. B) is voluntary part-time unemployment. C) is unemployment associated with the changing of jobs in a changing economy. D) is unemployment associated with declining industries.

  9. Frictional unemployment is the result of A) technological change or foreign competition. B) normal labor market turnover. C) a slowdown in the rate of economic expansion. D) irresponsible workers with poor work habits.

Person A This person has just graduated from high school and is working at a part-time job but wants a full-time job. Person B At the age of 45, this person was laid off from the automobile industry when new equipment was installed and the person did not have the skills necessary to use the equipment. This person now is searching to find a new job. Person C As a result of this personʹs spouse be-ing transferred to a job in a new city, this person is looking for a new job. Person D This person just graduated from college and is looking for an engineering job. In the meantime, this person is working full-time waiting tables.

  1. The above table shows answers given by people interviewed in the Current Population Survey. Which person (people) is (are) structurally un-employed? A) A and B B) B C) C D) B and D

  2. Cyclical unemployment A) is due mainly to job leavers. B) may increase or decrease during an expansion. C) occurs when technology improvements change job requirements. D) fluctuates over the business cycle.

  3. Which type of unemployment increases during a recession? A) cyclical unemployment B) frictional unemployment C) structural unemployment D) the natural rate of unemployment

  4. Auto and steel workers commonly experience this type of unemployment in a recession. A) frictional unemployment B) cyclical unemployment C) structural unemployment D) natural rate of unemployment

  5. Full employment occurs when A) structural unemployment is zero. B) cyclical unemployment is zero. C) frictional unemployment is zero. D) cyclical and frictional unemployment are zero.

  6. Full employment occurs when the A) unemployment rate equals the natural rate of unemployment. B) structural unemployment rate equals the frictional unemployment rate. C) natural unemployment rate equals the frictional unemployment rate. D) cyclical unemployment rate equals the natural rate of unemployment.

  7. Full employment occurs A) only if the unemployment rate is zero. B) only if the unemployment rate is equal to the natural rate of unemployment. C) only if unemployment is equal to structural unemployment plus cyclical unemployment. D) None of the above answers are correct.

  1. Suppose the natural rate of unemployment equals 6 percent and the current unemployment rate is 8 percent. We can conclude that A) there is no structural unemployment. B) there is no frictional unemployment. C) there is no cyclical unemployment. D) full employment is not occurring.

  2. The natural rate of unemployment is A) not a fixed percentage of the labor force. B) occurs when only there is no cyclical unemployment present. C) the unemployment rate when the economy is at potential GDP. D) All of the above answers are correct.

  3. When the economy moves into and out of recessions and expansions, the unemployment rate fluctuates around the A) natural rate of unemployment. B) structural unemployment rate. C) cyclical unemployment. D) frictional unemployment rate.

  4. Suppose the economy is experiencing frictional unemployment of 1 percent, structural unemployment of 3 percent and cyclical unemployment of 4 percent. What is the natural rate of unemployment? A) 3 percent. B) 4 percent. C) 5 percent. D) 7 percent.

  5. Suppose that the natural rate of unemployment is 4.5 percent and the actual rate of unemployment is 3. percent. Then cyclical unemployment is A) 1 percent. B) - 1 percent. C) 8 percent. D) 0 percent.

  6. Which of the following statements is true? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around real GDP. C) Potential GDP is the same as real GDP. D) When all of the economyʹs resources are fully employed, the value of production is called real GDP.

  7. When the unemployment rate is below the natural rate of unemployment, A) real GDP is greater than potential GDP. B) real GDP is less than potential GDP. C) real GDP equals potential GDP. D) None of the above is possible because it is impossible for the unemployment rate to be less than the natural rate.

  8. If more unemployed workers stop looking for work, the unemployment rate will A) not change. B) fall. C) rise. D) probably change, but in an unpredictable direction.

  9. During a recession, the ________. A) number of aggregate hours worked increases B) unemployment rate decreases C) employment-to-population ratio increases D) number of discouraged workers increases

Answer Key

Testname: CH

1) A

2) C

3) D

4) A

5) A

6) B

7) B

8) C

9) B

10) B

11) D

12) A

13) C

14) A

15) A

16) A

17) A

18) B

19) A

20) A

21) B

22) D

23) B

24) D

25) D

26) B

27) A

28) B

29) B

30) D

31) B

32) C

33) B

34) A

35) C

36) B

37) D

38) B

39) C

40) C

41) C

42) D

43) D

44) C

45) A

46) D

47) B

48) C

Answer Key

Testname: CH

49) D

50) D

51) C

52) D

53) B

54) A

55) D

56) A

57) D

58) C

59) D

60) D

61) D

62) A

63) A

64) D

65) D

66) A

67) C

68) D

69) C

70) D

71) C

72) C

73) B

74) B

75) A

76) B

77) D

78) A

79) D

80) D

81) B

82) C

83) D

84) C

85) D

86) B

87) A

88) B

89) C

90) B

91) B

92) D

93) B

94) C

95) A

96) C