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Chapter 06
An Introduction to Macroeconomics
Multiple Choice Questions
1. Macroeconomics is mostly focused on:
A. the individual markets within an economy.

B. only the largest industries in the economy.
C. the economy as a whole.
D. why specific businesses fail.
6-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. The two topics of primary concern in macroeconomics are:
A. short-run fluctuations in output and employment and long-run economic growth.

B. unemployment and wage rates in labor markets.
C. monopoly power of corporations and small business profitability.
D. oil prices and housing markets.
3. The business cycle depicts:
A. fluctuations in the general price level.

B. the phases a business goes through from when it first opens to when it finally closes.
C. the evolution of technology over time.
D. short-run fluctuations in output and employment.
4. The term "recession" describes a situation where:
A. inflation rates exceed normal levels.

B. output and living standards decline.
C. an economy's ability to produce is destroyed.
D. government takes a less active role in economic matters.
5. Which of the following is most closely related to recessions?
A. Positive long-run economic growth.

B. Rapid growth in the price level.
C. Falling rates of unemployment.
D. Negative real growth in output.
6-2
6. Which of the following statements is most accurate about advanced economies?
A. Economies experience a positive growth trend over the short run but experience significant
variability in the long run.
B. Economies experience a positive growth trend over the long run but experience significant
variability in the short run.
C. Economies experience positive and stable growth over both the long run and short run.
D. Economies experience little long-run growth in output but can experience significant
growth in the short run.
7. Real GDP measures the:
A. total dollar value of all goods and services produced within the borders of a country using
current prices.
B. value of final goods and services produced within the borders of a country, corrected for
price changes.
C. total dollar value of all goods and services consumed within the borders of a country,
adjusted for price changes.
D. value of all goods and services produced in the world, using current prices.
8. If the prices of all goods and services rose, but the quantity produced remained unchanged,
what would happen to nominal and real GDP?
A. Nominal and real GDP would both rise.

B. Nominal and real GDP would both be unchanged.
C. Real GDP would rise, but nominal GDP would be unchanged.
D. Nominal GDP would rise, but real GDP would be unchanged.
9. Real GDP is preferred to nominal GDP as a measure of economic performance because:
A. nominal GDP uses current prices and thus may over- or understate true changes in output.
B. nominal GDP only includes goods and excludes services.
C. nominal GDP is not adjusted for population changes.
D. real GDP accounts for changes in the quality of goods and services produced.
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10. Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for
$10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last
year's pizzas) but sold them for $12 each. Based on this information we can conclude that
Harry's production of large pepperoni pizzas:
A. increased both nominal and real GDP from last year.

B. increased nominal GDP from last year, but real GDP was unaffected.
C. increased real GDP from last year, but nominal GDP was unaffected.
D. did not change either nominal or real GDP from last year.
11. Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for
$10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last
year's pizzas) but sold them for $12 each. Based on this information we can conclude that
Harry's production of large pepperoni pizzas this year:
A. increased nominal GDP by $20,000 but left real GDP unchanged.

B. increased nominal GDP by $120,000 and increased real GDP by $100,000.
C. left nominal GDP unchanged but increased real GDP by $20,000.
D. increased nominal GDP by $120,000 but left real GDP unchanged.
12. Why are high rates of unemployment of concern to economists?
A. Higher rates of unemployment generally lead to higher inflation rates.

B. Environmental destruction is more prevalent when unemployment rates are high.
C. There is lost output that could have been produced if the unemployed had been working.
D. All of these options are reasons why economists are concerned about high unemployment
rates.
13. Unemployment describes the condition where:
A. equipment and machinery are going unused.

B. a person cannot get a job but is willing to work and is actively seeking work.
C. a person does not have a job, regardless of whether or not he or she wants one.
D. any resource sits idle.
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14. Higher rates of unemployment are linked with:
A. greater political stability because the employed tend to be more politically active.
B. higher crime rates as the unemployed seek to replace lost income.
C. lower rates of heart disease as the unemployed have eliminated job stress.
D. improvements in overall health as the unemployed have more leisure time to be physically
active.
15. Inflation is defined as:
A. an increase in the overall level of prices.

B. the rate of growth in nominal GDP.
C. a situation where all prices in the economy rise simultaneously.
D. the growth phase of the business cycle.
16. Why are economists concerned about inflation?
A. Inflation generally causes unemployment rates to rise.

B. Real GDP is necessarily falling when there is inflation.
C. Inflation lowers the standard of living for people whose income does not increase as fast
as the price level.
D. Inflation increases the value of peoples' saving and encourages overspending on goods
and services.
17. The three statistics that are the main focus for those measuring macroeconomic health are:
A. real GDP, inflation, and unemployment.

B. real GDP, nominal GDP, and inflation.
C. nominal GDP, unemployment, and inflation.
D. real GDP, nominal GDP, and unemployment.
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18. Modern economic growth refers to countries that have experienced an increase in:
A. real GDP over time.

B. nominal GDP over time.
C. real output spread evenly across all sectors of the economy.
D. real output per person.
19. Before the period of modern economic growth:
A. only civilizations such as the Roman Empire experienced economic growth.

B. rates of population growth virtually matched rates of output growth.
C. most economies realized high rates of growth in output per person.
D. output and population growth were stagnant.
20. In making international comparisons of living standards using GDP, which of the following is
not adjusted for in the calculation?
A. Purchasing power parity.

B. The quantity of resources available to the economy.
C. Population size.
D. Different currency values.
21. Which of the following countries would economists say definitively is achieving modern
economic growth?
A. Zimbabwe experiences a 5.6 percent increase in nominal GDP.

B. South Africa experiences a 4.2 percent increase in real GDP.
C. Ghana experiences a 3.6 percent increase in nominal GDP per person.
D. Nigeria experiences a 2.7 percent increase in real GDP per person.
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22. Which of the following is used to measure directly the average standard of living across
countries?
A. Real GDP.
B. Nominal GDP.
C. Purchasing power parity.
D. GDP per person.
23. Savings are generated whenever:
A. prices are rising.

B. current spending exceeds current income.
C. current income exceeds current spending.
D. real GDP exceeds nominal GDP.
24. When economists refer to "investment," they are describing a situation where:
A. people are buying shares of corporate stock.

B. resources are devoted to increasing future output.
C. money is saved in a bank account.
D. financial assets are purchased in the hope of a monetary gain.
25. Which of the following would an economist consider to be investment?
A. Boeing building a new factory.

B. Oprah buying a $10 million home from a fellow celebrity.
C. A stockbroker buying 10,000 shares of Starbucks stock.
D. All of these.
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26. For an economy to increase investment, it must:
A. increase saving.
B. increase present consumption.
C. buy more stocks and bonds.
D. increase nominal GDP.
27. If an economy wants to increase its current level of investment, it must:
A. sacrifice future consumption.

B. print more money.
C. offer more stocks and bonds to financial investors.
D. sacrifice current consumption.
28. Increased present saving:
A. comes at the expense of reduced current investment.

B. comes at the expense of reduced current consumption.
C. can only occur if the government increases the amount of money in circulation.
D. is only possible if the economy is experiencing positive growth in real GDP.
29. Banks and other financial institutions:
A. are the primary investors in equipment, factories, and other capital goods.
B. lack relevance in the modern economy because they focus primarily on financial assets
and generally do not engage in real investment activity.
C. promote economic growth by helping to direct household saving to businesses that want to
invest.
D. often hinder economic activity by creating barriers between household savers and firms
wanting to invest in capital goods.
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30. Shocks to the economy occur:
A. when expectations are unmet.

B. whenever the price level changes.
C. whenever government implements fiscal or monetary policy.
D. because most economic behavior is unpredictable.
31. Shocks to the economy occur when:
A. stock prices rise by more than 10 percent per year.

B. government takes a more active role in the economy.
C. prices are flexible.
D. actual economic events do not match what people expected.
32. Demand shocks:
A. refer to unexpected changes in the desires of households and businesses to buy goods
and services.
B. refer to unexpected changes in the ability of firms to produce and sell goods and services.
C. always have a negative impact on the economy.
D. cause fewer short-run fluctuations than supply shocks.
33. Which of the following is an example of a demand shock?
A. Hurricane Harry knocks out oil drilling platforms in the Gulf of Mexico.
B. Consumers become worried about job loss and buy fewer goods and services than
expected.
C. Floods in the Midwest destroy crops.
D. The federal government unexpectedly requires automobile producers to raise fuel
efficiency standards.
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34. Supply shocks:
A. occur more frequently than demand shocks.

B. usually result from fiscal and monetary policy changes.
C. occur when sellers face unexpected changes in the availability and/or prices of key inputs.
D. have been responsible for most of the recessions in the United States since World War II.
35. Which of the following is an example of a supply shock?
A. A surge in consumer optimism prompts increased buying of goods and services.

B. A surprise tax rebate from the government gives people more money to spend.
C. A dramatic increase in energy prices increases production costs for firms in the economy.
D. Government increases spending on education.
36. When demand shocks lead to recessions, it is mainly due to:
A. price inflexibility.
B. the inability of government policy to affect demand.
C. unexpected changes in the supply of goods and services.
D. government regulations that prevent firms from adjusting output in response to the
shocks.
37. Suppose that Techno TV produces LCD televisions. At a price of $2,000 per television,
Techno determines that its optimal output is 3,000 television sets per week. If prices are
sticky and fears of a recession reduce demand for LCD televisions, we would expect Techno
to:
A. reduce output in the long run.

B. reduce output in the short run.
C. raise prices in the short run to compensate for lost revenue.
D. lower prices in the short run to offset the reduced demand.
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38.
The figure depicts a situation where:
A. prices are sticky, but output is flexible.

B. prices are flexible, but output is constant.
C. prices and output are both flexible.
D. prices are sticky and output is constant.
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39.
Refer to the figure. Assuming this market is representative of the economy as a whole, this
economy:
A. is highly susceptible to recessions and high unemployment.

B. faces regularly fluctuating output levels in response to demand shocks.
C. is capable of always producing at its optimal capacity.
D. can only lessen the impacts of business cycles through active government policy.
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40.
Refer to the figure. Assuming this market is representative of the economy as a whole, a
positive demand shock will:
A. increase both the price level and the quantity of output produced.
B. increase output but leave prices unchanged.
C. lower the price level but leave output unchanged.
D. raise the price level but leave output unchanged.
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41.
negative demand shock will:
A. cause inflation.
B. increase unemployment.
C. lower prices but leave output unaffected.
D. reduce both prices and output.
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42.

6-15
43.
economy:
A. is highly susceptible to inflation.

B. faces fluctuating output levels whenever there is a demand shock.
D. is largely immune to business cycles.
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44.
6-17
45.
negative demand shock will most likely:
A. cause inflation.
46.
Refer to the figures. Which figure(s) represent(s) a situation where prices are flexible?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.
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47.
Refer to the figures. Which figure(s) represent(s) a situation where prices are sticky?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.
48.
Refer to the figures. Which figure(s) represent(s) a situation where negative demand shocks
can result in a recession?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.
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49.
Refer to the figures. Which of the following events would most likely result in higher
unemployment?
A. A shift from D2 to D1 in Figure A.

B. A shift from D2 to D3 in Figure A.
C. A shift from D2 to D1 in Figure B.
D. A shift from D2 to D3 in Figure B.
50.
Refer to the figures. Which of the following events would most likely result in inflation?

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51.
Refer to the figures. Which figure(s) represent(s) a situation where firms are likely to hold
inventories to accommodate unexpected changes in demand?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.
52. Which of the following results from firms holding inventories?
A. The economy is much more susceptible to business cycle fluctuations.

B. Demand shocks occur with greater frequency.
C. Demand shocks occur less frequently.
D. Firms can maintain production levels and adjust inventories in response to demand
shocks.
6-21
53. Kara's Kittens typically produces and sells at its optimal (lowest per-unit cost) level of 30
scratching posts per week. Kara's also maintains an inventory of 20 scratching posts. If prices
are sticky and there is a positive demand shock this week resulting in demand for 40
scratching posts, we would expect Kara's to:
A. sell the additional scratching posts out of its inventory and rebuild the inventory later when
a negative demand shock occurs.
B. permanently expand production to 40 scratching posts per week.
C. raise prices on scratching posts.
D. introduce a new line of scratching posts.
54. In situations of sticky prices and negative demand shocks, we would expect firms to:
A. deplete inventories before increasing production.

B. reduce production before building up inventories.
C. build up inventories before reducing production.
D. lower prices before reducing production or building up inventories.
55. Which of the following statements best describes how firms respond to demand shocks
under conditions of inflexible prices?
A. Firms respond to shorter-term demand shocks by adjusting production levels; more

persistent changes in demand result in changes in inventories.
B. Firms respond to shorter-term demand shocks by adjusting inventories; more persistent
changes in demand result in changes in production levels.
C. Firms are reluctant to adjust inventory levels because the costs are higher than changing
the quantity of output produced.
D. Firms are quick to let go of workers when negative demand shocks occur.
6-22
56. For which of the following goods and services are prices most sticky?
A. Taxi fares.
B. Beer.
C. Coin-operated laundry machines.
D. Airline tickets.
57. For which of the following goods are services are prices least sticky?
A. Taxi fares.
B. Haircuts.
C. Microwave ovens.
D. Airline tickets.
58. The average number of months between price changes for gasoline is:
A. 0.2.
B. 0.6.
C. 1.0.
D. 1.8.
59. Prices for airline tickets change on average about once per month. This would suggest that
airline ticket prices are:
A. stuck.
B. determined in a highly competitive market.
C. relatively sticky.
D. relatively flexible.
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60. Prices tend to be sticky because:
A. firms are worried that frequent price changes would annoy consumers.
B. most firms have agreements with each other to fix prices at profit-maximizing levels.
C. government controls most prices.
D. foreign competition discourages domestic firms from price changes.
61. Which of the following best explains why prices tend to be inflexible even when demand
changes?
A. Government regulations limit the number of times a firm can change prices in a year.
B. In most industries the profit-maximizing price does not change even when demand
changes.
C. Production costs do not tend to change when a firm varies its level of output.
D. Firms may be reluctant to change prices for fear of setting off a price war or losing
customers to rivals.
62. Prices are particularly sticky:
A. when there are widespread macroeconomic and monetary disturbances in the economy.
B. in the long run.
C. when markets are highly competitive.
D. when the economy is at full employment and positive demand shocks are occurring.
63. Which of the following statements best describes price flexibility in the economy?
A. Prices tend to be sticky in the short run and stuck in the long run.
B. Prices tend to be just as sticky in the short run as in the long run.
C. Prices tend to be sticky in the short run but become more flexible over time.
D. Prices tend to be flexible in the short run but become more sticky over time.
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64.
Refer to the figures. As the economy moves from the very short run to the longer run, we
would expect:
A. the representation of the economy to move from Figure A to Figure B.

B. the representation of the economy to move from Figure B to Figure A.
C. demand shocks to be eliminated.
D. the economy to gravitate to P1.
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65.
Refer to the figures. In terms of representing the economy:
A. neither Figure A nor Figure B consistently represents either the very short run or the longer
run.
B. demand shocks affect levels of output and employment in Figure A; demand shocks have
no effect in Figure B.
C. Figure A represents the very short run, where output is fixed, and Figure B represents the
longer run.
D. Figure B represents the very short run, where prices are sticky, and Figure A represents
the longer run.
6-26
66.
Refer to the figures. If government policy can be used to affect the level of demand in the
economy, these figures suggest that government policy:
A. can affect the level of output in the very short run, when prices are stuck.
B. can affect the level of output in the longer run, when prices are flexible.
C. cannot affect output in either the very short run or the longer run.
D. can be used to simultaneously affect the levels of output and prices.
67. The overall behavior of the economy:
A. is remarkably stable over time.

B. differs over time as prices become increasingly flexible in the months and years following a
shock.
C. differs over time as prices become increasingly sticky in the months and years following a
shock.
D. is easily controlled and stabilized by government policy.
6-27
68. (Consider This) What is the difference between financial investment and economic
investment?
A. There is no difference between the two.

B. Financial investment refers to the purchase of financial assets only; economic investment
refers to the purchase of any new or used capital goods.
C. Economic investment is adjusted for inflation; financial investment is not.
D. Financial investment refers to the purchase of assets for financial gain; economic
investment refers to the purchase of newly created capital goods.
69. (Consider This) Which of the following is an example of economic investment?
A. Volvo buys an old factory building from General Motors.

B. Nike buys a new machine that increases shoe production.
C. Bill Gates buys shares of stock in IBM.
D. Warren Buffet buys U.S. savings bonds.
70. (Consider This) Suppose that Toyota buys a factory previous owned by Chrysler Motors.
Economists would:
A. consider this to be an economic investment.

B. not consider this to be an economic investment because Toyota is less efficient than
Chrysler.
C. not consider this to be an economic investment because no new capital is created through
the purchase.
D. not consider this to be an economic investment because there is no way to know how it
will affect stock holdings in the two companies.
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71. (Consider This) In 2008 and 2009, the United States experienced what has come to be known
as the:
A. Great Depression.
B. Great Recession.
C. Great Expansion.
D. Great Stagnation.
72. (Consider This) The U.S. recession that occurred in 2008 and 2009 represented a case
where:
A. government policy intervention effectively offset the negative demand shock and
minimized the effects on output and employment.
B. prices were somewhat flexible, so the impact of the demand shock was felt about the
same in terms of price and output changes.
C. prices were relatively flexible, minimizing the impact on total output and employment.
D. prices were relatively sticky and most of the impact was on total output.
73. (Last Word) Which of the following explanations argues that the Great Recession resulted
from asset-price bubbles caused by euphoria and debt-fueled speculation?
A. Minsky explanation.
B. Austrian explanation.
C. Stimulus explanation.
D. Structural explanation.
74. (Last Word) According to the Austrian School, the best explanation for what caused the Great
Recession was that:
A. tax rates that were too high discouraged spending.

B. government spending that was too low created insufficient public capital.
C. interest rates that were too low induced excessive borrowing.
D. interest rates that were too high discouraged firm borrowing and investment.
6-29
75. (Last Word) Advocates for a structural solution to the Great Recession argued that:
A. government should cut taxes across the board to stimulate demand for goods and services.
B. firms should be allowed to go bankrupt, allowing the economy to correct for resource
misallocations.
C. firms in financial distress should be taken over by the government and run for the public
good.
D. massive public works projects should be implemented to produce public capital, keep
people employed, and help workers maintain job skills.
True / False Questions
76. The business cycle is primarily concerned with changes in the level of overall prices over
time.
True False
77. A sometimes short, sometimes extended period of declining output and living standards is
referred to as a recession.
True False
78. The business cycle reflects both short-run fluctuations in output and long-run economic
growth.
True False
79. Economists and policymakers are generally more concerned about nominal GDP than real
GDP.
True False
6-30
80. Nominal GDP measures a nation's output in current year prices.
True False
81. Any person without a job is considered to be unemployed.
True False
82. Higher unemployment rates are linked with higher crime rates and higher rates of physical
and mental illness.
True False
83. Inflation reduces the purchasing power of a person's income and savings.
True False
84. From 1995 until the start of the recession in 2007, the U.S. economy grew at the same rate as
the economy of Japan.
True False
85. In 2008-2009, the U.S. economy lost 8 million jobs and saw the unemployment rate rise from
4.6 percent to as high as 10.1 percent.
True False
86. Real GDP measures the change in the price level over time.
True False
87. Modern economic growth refers to any situation where a nation's output increases.
True False
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88. In order to achieve modern economic growth, a nation's output must grow faster than its
population.
True False
89. A nation that realizes a 3 percent increase in its output per person is experiencing modern
economic growth.
True False
90. Output per person has grown steadily since the beginning of the Roman Empire.
True False
91. China's GDP per person in 2011 was about one-third of U.S. GDP per person in the same
year.
True False
92. Economists refer to purchases of stocks and bonds as "investment."
True False
93. The amount of investment in an economy is ultimately limited by the amount of savings in
that economy.
True False
94. Increasing investment in the present means forgoing future consumption.
True False
95. A nation that wants to invest in more newly created capital in the present must be willing to
forgo present consumption.
True False
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96. Banks and other financial institutions provide the link between savers and economic
investors in the macroeconomy.
True False
97. Economists believe that expectations have little impact on macroeconomic outcomes.
True False
98. Shocks occur when actual events do not match expectations.
True False
99. A demand shock occurs when large numbers of consumers unexpectedly reduce their
purchases of goods and services.
True False
100.At the end of the summer driving season, the demand for gasoline typically declines. This is
an example of a negative demand shock.
True False
101.Demand shocks may be positive or negative.
True False
102."Supply shocks" occur any time there is a change in the supply of goods and services.
True False
103.Economists believe that most short-run fluctuations in output are the result of supply
shocks.
True False
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104.Demand shocks cause problems in the macroeconomy primarily because prices are sticky.
True False
105.In the very short run, demand shocks will tend to change the level of output but have little
effect on prices.
True False
106.In the very short run, firms tend to respond to demand shocks by changing their prices.
True False
107.Negative demand shocks have a more significant impact on output and employment when
prices are flexible.
True False
108.In the short run, firms are more likely to respond to demand shocks by altering inventory
levels than by changing how much they produce.
True False
109.Milk prices tend to be stickier than gasoline prices.
True False
110.Prices tend to be stickier in the shorter run than in the longer run.
True False
111.Prices tend to be sticky partially because sellers know that consumers prefer stable prices.
True False
6-34
112.Prices tend to be more flexible when there are only two or three rival firms rather than a large
number of sellers in the market.
True False
113.The "sticky price" model is the only one used by macroeconomists.
True False
114.(Consider This) The term "economic investment" refers only to money spent purchasing
newly created capital goods such as factories, tools, and warehouses.
True False
115.(Consider This) If a farmer purchases 10 acres of farmland from a neighboring farmer, this
would be considered an economic investment.
True False
116.(Consider This) If Ford Motor Company purchases factory equipment previously used by
General Motors, this would be considered an economic investment.
True False
6-35
Chapter 06 An Introduction to Macroeconomics Answer Key
Multiple Choice Questions
1. Macroeconomics is mostly focused on:
A. the individual markets within an economy.

B. only the largest industries in the economy.
C. the economy as a whole.
D. why specific businesses fail.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Explain why economists focus on GDP; inflation; and unemployment when assessing the health
of an entire economy.
Topic: Performance and policy
2. The two topics of primary concern in macroeconomics are:
A. short-run fluctuations in output and employment and long-run economic growth.

B. unemployment and wage rates in labor markets.
C. monopoly power of corporations and small business profitability.
D. oil prices and housing markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6-36
3. The business cycle depicts:
A. fluctuations in the general price level.

B. the phases a business goes through from when it first opens to when it finally closes.
C. the evolution of technology over time.
D. short-run fluctuations in output and employment.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
4. The term "recession" describes a situation where:
A. inflation rates exceed normal levels.

B. output and living standards decline.
C. an economy's ability to produce is destroyed.
D. government takes a less active role in economic matters.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6-37
5. Which of the following is most closely related to recessions?
A. Positive long-run economic growth.

B. Rapid growth in the price level.
C. Falling rates of unemployment.
D. Negative real growth in output.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
6. Which of the following statements is most accurate about advanced economies?
A. Economies experience a positive growth trend over the short run but experience
significant variability in the long run.
B. Economies experience a positive growth trend over the long run but experience
significant variability in the short run.
C. Economies experience positive and stable growth over both the long run and short run.
D. Economies experience little long-run growth in output but can experience significant
growth in the short run.
AACSB: Reflective Thinking

Blooms: Understand
6-38
7. Real GDP measures the:
A. total dollar value of all goods and services produced within the borders of a country
using current prices.
B. value of final goods and services produced within the borders of a country, corrected
for price changes.
C. total dollar value of all goods and services consumed within the borders of a country,
adjusted for price changes.
D. value of all goods and services produced in the world, using current prices.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
8. If the prices of all goods and services rose, but the quantity produced remained
unchanged, what would happen to nominal and real GDP?
A. Nominal and real GDP would both rise.

B. Nominal and real GDP would both be unchanged.
C. Real GDP would rise, but nominal GDP would be unchanged.
D. Nominal GDP would rise, but real GDP would be unchanged.

Blooms: Understand
6-39
9. Real GDP is preferred to nominal GDP as a measure of economic performance because:
A. nominal GDP uses current prices and thus may over- or understate true changes in
output.
B. nominal GDP only includes goods and excludes services.
C. nominal GDP is not adjusted for population changes.
D. real GDP accounts for changes in the quality of goods and services produced.

Blooms: Understand
10. Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold
for $10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to
last year's pizzas) but sold them for $12 each. Based on this information we can conclude
that Harry's production of large pepperoni pizzas:
A. increased both nominal and real GDP from last year.

B. increased nominal GDP from last year, but real GDP was unaffected.
C. increased real GDP from last year, but nominal GDP was unaffected.
D. did not change either nominal or real GDP from last year.
AACSB: Analytic
Blooms: Apply
6-40
11. Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold
for $10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to
last year's pizzas) but sold them for $12 each. Based on this information we can conclude
that Harry's production of large pepperoni pizzas this year:
A. increased nominal GDP by $20,000 but left real GDP unchanged.

B. increased nominal GDP by $120,000 and increased real GDP by $100,000.
C. left nominal GDP unchanged but increased real GDP by $20,000.
D. increased nominal GDP by $120,000 but left real GDP unchanged.
AACSB: Analytic
Blooms: Apply
12. Why are high rates of unemployment of concern to economists?
A. Higher rates of unemployment generally lead to higher inflation rates.

B. Environmental destruction is more prevalent when unemployment rates are high.
C. There is lost output that could have been produced if the unemployed had been
working.
D. All of these options are reasons why economists are concerned about high
unemployment rates.

Blooms: Understand
6-41
13. Unemployment describes the condition where:
A. equipment and machinery are going unused.

B. a person cannot get a job but is willing to work and is actively seeking work.
C. a person does not have a job, regardless of whether or not he or she wants one.
D. any resource sits idle.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
14. Higher rates of unemployment are linked with:
A. greater political stability because the employed tend to be more politically active.
B. higher crime rates as the unemployed seek to replace lost income.
C. lower rates of heart disease as the unemployed have eliminated job stress.
D. improvements in overall health as the unemployed have more leisure time to be
physically active.

Blooms: Remember
Difficulty: 1 Easy
6-42
15. Inflation is defined as:
A. an increase in the overall level of prices.

B. the rate of growth in nominal GDP.
C. a situation where all prices in the economy rise simultaneously.
D. the growth phase of the business cycle.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
16. Why are economists concerned about inflation?
A. Inflation generally causes unemployment rates to rise.

B. Real GDP is necessarily falling when there is inflation.
C. Inflation lowers the standard of living for people whose income does not increase as
fast as the price level.
D. Inflation increases the value of peoples' saving and encourages overspending on goods
and services.

Blooms: Understand
6-43
17. The three statistics that are the main focus for those measuring macroeconomic health
are:
A. real GDP, inflation, and unemployment.

B. real GDP, nominal GDP, and inflation.
C. nominal GDP, unemployment, and inflation.
D. real GDP, nominal GDP, and unemployment.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
18. Modern economic growth refers to countries that have experienced an increase in:
A. real GDP over time.

B. nominal GDP over time.
C. real output spread evenly across all sectors of the economy.
D. real output per person.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Discuss why sustained increases in living standards are a historically recent phenomenon.
Topic: Miracle of modern economic growth
6-44
19. Before the period of modern economic growth:
A. only civilizations such as the Roman Empire experienced economic growth.

B. rates of population growth virtually matched rates of output growth.
C. most economies realized high rates of growth in output per person.
D. output and population growth were stagnant.

Blooms: Understand
20. In making international comparisons of living standards using GDP, which of the following
is not adjusted for in the calculation?
A. Purchasing power parity.

B. The quantity of resources available to the economy.
C. Population size.
D. Different currency values.
AACSB: Analytic
Blooms: Understand
6-45
21. Which of the following countries would economists say definitively is achieving modern
economic growth?
A. Zimbabwe experiences a 5.6 percent increase in nominal GDP.

B. South Africa experiences a 4.2 percent increase in real GDP.
C. Ghana experiences a 3.6 percent increase in nominal GDP per person.
D. Nigeria experiences a 2.7 percent increase in real GDP per person.
AACSB: Analytic
Blooms: Understand
22. Which of the following is used to measure directly the average standard of living across
countries?
A. Real GDP.
B. Nominal GDP.
C. Purchasing power parity.
D. GDP per person.
AACSB: Analytic
Blooms: Understand
6-46
23. Savings are generated whenever:
A. prices are rising.

B. current spending exceeds current income.
C. current income exceeds current spending.
D. real GDP exceeds nominal GDP.
AACSB: Analytic
Blooms: Understand
Learning Objective: 06-03 Identify why saving and investment are key factors in promoting rising living standards.
Topic: Saving, investment, and choosing between present and future consumption
24. When economists refer to "investment," they are describing a situation where:
A. people are buying shares of corporate stock.

B. resources are devoted to increasing future output.
C. money is saved in a bank account.
D. financial assets are purchased in the hope of a monetary gain.
AACSB: Analytic
Blooms: Understand
6-47
25. Which of the following would an economist consider to be investment?
A. Boeing building a new factory.

B. Oprah buying a $10 million home from a fellow celebrity.
C. A stockbroker buying 10,000 shares of Starbucks stock.
D. All of these.

Blooms: Apply
26. For an economy to increase investment, it must:
A. increase saving.
B. increase present consumption.
C. buy more stocks and bonds.
D. increase nominal GDP.

Blooms: Understand
6-48
27. If an economy wants to increase its current level of investment, it must:
A. sacrifice future consumption.

B. print more money.
C. offer more stocks and bonds to financial investors.
D. sacrifice current consumption.

Blooms: Understand
28. Increased present saving:
A. comes at the expense of reduced current investment.

B. comes at the expense of reduced current consumption.
C. can only occur if the government increases the amount of money in circulation.
D. is only possible if the economy is experiencing positive growth in real GDP.

Blooms: Understand
6-49
29. Banks and other financial institutions:
A. are the primary investors in equipment, factories, and other capital goods.
B. lack relevance in the modern economy because they focus primarily on financial assets
and generally do not engage in real investment activity.
C. promote economic growth by helping to direct household saving to businesses that
want to invest.
D. often hinder economic activity by creating barriers between household savers and firms
wanting to invest in capital goods.

Blooms: Understand
30. Shocks to the economy occur:
A. when expectations are unmet.

B. whenever the price level changes.
C. whenever government implements fiscal or monetary policy.
D. because most economic behavior is unpredictable.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 Describe why economists believe that "shocks" and "sticky prices" are responsible for short-
run fluctuations in output and employment.
Topic: Uncertainty, expectations, and shocks
6-50
31. Shocks to the economy occur when:
A. stock prices rise by more than 10 percent per year.

B. government takes a more active role in the economy.
C. prices are flexible.
D. actual economic events do not match what people expected.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
32. Demand shocks:
A. refer to unexpected changes in the desires of households and businesses to buy goods
and services.
B. refer to unexpected changes in the ability of firms to produce and sell goods and
services.
C. always have a negative impact on the economy.
D. cause fewer short-run fluctuations than supply shocks.
AACSB: Analytic
Blooms: Understand
6-51
33. Which of the following is an example of a demand shock?
A. Hurricane Harry knocks out oil drilling platforms in the Gulf of Mexico.
B. Consumers become worried about job loss and buy fewer goods and services than
expected.
C. Floods in the Midwest destroy crops.
D. The federal government unexpectedly requires automobile producers to raise fuel
efficiency standards.

Blooms: Apply
34. Supply shocks:
A. occur more frequently than demand shocks.

B. usually result from fiscal and monetary policy changes.
C. occur when sellers face unexpected changes in the availability and/or prices of key
inputs.
D. have been responsible for most of the recessions in the United States since World War
II.
AACSB: Analytic
Blooms: Understand
6-52
35. Which of the following is an example of a supply shock?
A. A surge in consumer optimism prompts increased buying of goods and services.

B. A surprise tax rebate from the government gives people more money to spend.
C. A dramatic increase in energy prices increases production costs for firms in the
economy.
D. Government increases spending on education.
AACSB: Analytic
Blooms: Understand
36. When demand shocks lead to recessions, it is mainly due to:
A. price inflexibility.
B. the inability of government policy to affect demand.
C. unexpected changes in the supply of goods and services.
D. government regulations that prevent firms from adjusting output in response to the
shocks.

Blooms: Understand
6-53
37. Suppose that Techno TV produces LCD televisions. At a price of $2,000 per television,
Techno determines that its optimal output is 3,000 television sets per week. If prices are
sticky and fears of a recession reduce demand for LCD televisions, we would expect
Techno to:
A. reduce output in the long run.

B. reduce output in the short run.
C. raise prices in the short run to compensate for lost revenue.
D. lower prices in the short run to offset the reduced demand.

Blooms: Analyze
Difficulty: 3 Hard
6-54
38.


Blooms: Understand
Type: Graph
6-55
39.
economy:
A. is highly susceptible to recessions and high unemployment.

B. faces regularly fluctuating output levels in response to demand shocks.
D. can only lessen the impacts of business cycles through active government policy.

Blooms: Understand
Type: Graph
6-56
40.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-57
41.
negative demand shock will:
A. cause inflation.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-58
42.


Blooms: Understand
Type: Graph
6-59
43.
economy:
A. is highly susceptible to inflation.

B. faces fluctuating output levels whenever there is a demand shock.
D. is largely immune to business cycles.

Blooms: Understand
Type: Graph
6-60
44.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-61
45.
negative demand shock will most likely:
A. cause inflation.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-62
46.
Refer to the figures. Which figure(s) represent(s) a situation where prices are flexible?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.

Blooms: Understand
Type: Graph
6-63
47.
Refer to the figures. Which figure(s) represent(s) a situation where prices are sticky?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.

Blooms: Understand
Type: Graph
6-64
48.
Refer to the figures. Which figure(s) represent(s) a situation where negative demand
shocks can result in a recession?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-65
49.
Refer to the figures. Which of the following events would most likely result in higher
unemployment?


Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-66
50.
Refer to the figures. Which of the following events would most likely result in inflation?


Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-67
51.
Refer to the figures. Which figure(s) represent(s) a situation where firms are likely to hold
inventories to accommodate unexpected changes in demand?
A. A only.
B. B only.
C. Both A and B.
D. Neither A nor B.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-68
52. Which of the following results from firms holding inventories?
A. The economy is much more susceptible to business cycle fluctuations.

B. Demand shocks occur with greater frequency.
C. Demand shocks occur less frequently.
D. Firms can maintain production levels and adjust inventories in response to demand
shocks.

Blooms: Understand
53. Kara's Kittens typically produces and sells at its optimal (lowest per-unit cost) level of 30
scratching posts per week. Kara's also maintains an inventory of 20 scratching posts. If
prices are sticky and there is a positive demand shock this week resulting in demand for
40 scratching posts, we would expect Kara's to:
A. sell the additional scratching posts out of its inventory and rebuild the inventory later
when a negative demand shock occurs.
B. permanently expand production to 40 scratching posts per week.
C. raise prices on scratching posts.
D. introduce a new line of scratching posts.

Blooms: Apply
6-69
54. In situations of sticky prices and negative demand shocks, we would expect firms to:
A. deplete inventories before increasing production.

B. reduce production before building up inventories.
C. build up inventories before reducing production.
D. lower prices before reducing production or building up inventories.

Blooms: Understand
55. Which of the following statements best describes how firms respond to demand shocks
under conditions of inflexible prices?
A. Firms respond to shorter-term demand shocks by adjusting production levels; more

persistent changes in demand result in changes in inventories.
B. Firms respond to shorter-term demand shocks by adjusting inventories; more
persistent changes in demand result in changes in production levels.
C. Firms are reluctant to adjust inventory levels because the costs are higher than
changing the quantity of output produced.
D. Firms are quick to let go of workers when negative demand shocks occur.

Blooms: Understand
6-70
56. For which of the following goods and services are prices most sticky?
A. Taxi fares.
B. Beer.
C. Coin-operated laundry machines.
D. Airline tickets.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Characterize the degree to which various prices in the economy are sticky.
Topic: How sticky are prices?
57. For which of the following goods are services are prices least sticky?
A. Taxi fares.
B. Haircuts.
C. Microwave ovens.
D. Airline tickets.

Blooms: Remember
Difficulty: 1 Easy
6-71
58. The average number of months between price changes for gasoline is:
A. 0.2.
B. 0.6.
C. 1.0.
D. 1.8.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
59. Prices for airline tickets change on average about once per month. This would suggest
that airline ticket prices are:
A. stuck.
B. determined in a highly competitive market.
C. relatively sticky.
D. relatively flexible.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6-72
60. Prices tend to be sticky because:
A. firms are worried that frequent price changes would annoy consumers.
B. most firms have agreements with each other to fix prices at profit-maximizing levels.
C. government controls most prices.
D. foreign competition discourages domestic firms from price changes.

Blooms: Understand
61. Which of the following best explains why prices tend to be inflexible even when demand
changes?
A. Government regulations limit the number of times a firm can change prices in a year.
B. In most industries the profit-maximizing price does not change even when demand
changes.
C. Production costs do not tend to change when a firm varies its level of output.
D. Firms may be reluctant to change prices for fear of setting off a price war or losing
customers to rivals.

Blooms: Understand
6-73
62. Prices are particularly sticky:
A. when there are widespread macroeconomic and monetary disturbances in the

economy.
B. in the long run.
C. when markets are highly competitive.
D. when the economy is at full employment and positive demand shocks are occurring.

Blooms: Understand
63. Which of the following statements best describes price flexibility in the economy?
A. Prices tend to be sticky in the short run and stuck in the long run.
B. Prices tend to be just as sticky in the short run as in the long run.
C. Prices tend to be sticky in the short run but become more flexible over time.
D. Prices tend to be flexible in the short run but become more sticky over time.

Blooms: Remember
Difficulty: 1 Easy
6-74
64.
Refer to the figures. As the economy moves from the very short run to the longer run, we
would expect:
A. the representation of the economy to move from Figure A to Figure B.

B. the representation of the economy to move from Figure B to Figure A.
C. demand shocks to be eliminated.
D. the economy to gravitate to P1.

Blooms: Understand
Learning Objective: 06-06 Explain why the greater flexibility of prices as time passes causes economists to utilize
different macroeconomic models for different time horizons.
Topic: Categorizing macroeconomic models using price stickiness
Type: Graph
6-75
65.
Refer to the figures. In terms of representing the economy:
A. neither Figure A nor Figure B consistently represents either the very short run or the
longer run.
B. demand shocks affect levels of output and employment in Figure A; demand shocks
have no effect in Figure B.
C. Figure A represents the very short run, where output is fixed, and Figure B represents
the longer run.
D. Figure B represents the very short run, where prices are sticky, and Figure A represents
the longer run.

Blooms: Understand
Type: Graph
6-76
66.
Refer to the figures. If government policy can be used to affect the level of demand in the
economy, these figures suggest that government policy:
A. can affect the level of output in the very short run, when prices are stuck.
B. can affect the level of output in the longer run, when prices are flexible.
C. cannot affect output in either the very short run or the longer run.
D. can be used to simultaneously affect the levels of output and prices.

Blooms: Analyze
Difficulty: 3 Hard
Type: Graph
6-77
67. The overall behavior of the economy:
A. is remarkably stable over time.

B. differs over time as prices become increasingly flexible in the months and years
following a shock.
C. differs over time as prices become increasingly sticky in the months and years
following a shock.
D. is easily controlled and stabilized by government policy.

Blooms: Understand
68. (Consider This) What is the difference between financial investment and economic
investment?
A. There is no difference between the two.

B. Financial investment refers to the purchase of financial assets only; economic
investment refers to the purchase of any new or used capital goods.
C. Economic investment is adjusted for inflation; financial investment is not.
D. Financial investment refers to the purchase of assets for financial gain; economic
investment refers to the purchase of newly created capital goods.
AACSB: Analytic
Blooms: Understand
6-78
69. (Consider This) Which of the following is an example of economic investment?
A. Volvo buys an old factory building from General Motors.

B. Nike buys a new machine that increases shoe production.
C. Bill Gates buys shares of stock in IBM.
D. Warren Buffet buys U.S. savings bonds.

Blooms: Apply
70. (Consider This) Suppose that Toyota buys a factory previous owned by Chrysler Motors.
Economists would:
A. consider this to be an economic investment.

B. not consider this to be an economic investment because Toyota is less efficient than
Chrysler.
C. not consider this to be an economic investment because no new capital is created
through the purchase.
D. not consider this to be an economic investment because there is no way to know how it
will affect stock holdings in the two companies.

Blooms: Apply
6-79
71. (Consider This) In 2008 and 2009, the United States experienced what has come to be
known as the:
A. Great Depression.
B. Great Recession.
C. Great Expansion.
D. Great Stagnation.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
72. (Consider This) The U.S. recession that occurred in 2008 and 2009 represented a case
where:
A. government policy intervention effectively offset the negative demand shock and
minimized the effects on output and employment.
B. prices were somewhat flexible, so the impact of the demand shock was felt about the
same in terms of price and output changes.
C. prices were relatively flexible, minimizing the impact on total output and employment.
D. prices were relatively sticky and most of the impact was on total output.

Blooms: Understand
6-80
73. (Last Word) Which of the following explanations argues that the Great Recession resulted
from asset-price bubbles caused by euphoria and debt-fueled speculation?
A. Minsky explanation.
B. Austrian explanation.
C. Stimulus explanation.
D. Structural explanation.

Blooms: Remember
Difficulty: 1 Easy
74. (Last Word) According to the Austrian School, the best explanation for what caused the
Great Recession was that:
A. tax rates that were too high discouraged spending.

B. government spending that was too low created insufficient public capital.
C. interest rates that were too low induced excessive borrowing.
D. interest rates that were too high discouraged firm borrowing and investment.

Blooms: Understand
6-81
75. (Last Word) Advocates for a structural solution to the Great Recession argued that:
A. government should cut taxes across the board to stimulate demand for goods and
services.
B. firms should be allowed to go bankrupt, allowing the economy to correct for resource
misallocations.
C. firms in financial distress should be taken over by the government and run for the
public good.
D. massive public works projects should be implemented to produce public capital, keep
people employed, and help workers maintain job skills.

Blooms: Understand
True / False Questions
76. The business cycle is primarily concerned with changes in the level of overall prices over
time.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6-82
77. A sometimes short, sometimes extended period of declining output and living standards is
referred to as a recession.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
78. The business cycle reflects both short-run fluctuations in output and long-run economic
growth.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
79. Economists and policymakers are generally more concerned about nominal GDP than real
GDP.
FALSE

Blooms: Understand
6-83
80. Nominal GDP measures a nation's output in current year prices.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
81. Any person without a job is considered to be unemployed.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
82. Higher unemployment rates are linked with higher crime rates and higher rates of physical
and mental illness.
TRUE

Blooms: Remember
Difficulty: 1 Easy
6-84
83. Inflation reduces the purchasing power of a person's income and savings.
TRUE

Blooms: Remember
Difficulty: 1 Easy
84. From 1995 until the start of the recession in 2007, the U.S. economy grew at the same rate
as the economy of Japan.
FALSE

Blooms: Remember
Difficulty: 1 Easy
85. In 2008-2009, the U.S. economy lost 8 million jobs and saw the unemployment rate rise
from 4.6 percent to as high as 10.1 percent.
TRUE

Blooms: Remember
Difficulty: 1 Easy
6-85
86. Real GDP measures the change in the price level over time.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
87. Modern economic growth refers to any situation where a nation's output increases.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
88. In order to achieve modern economic growth, a nation's output must grow faster than its
population.
TRUE
AACSB: Analytic
Blooms: Understand
6-86
89. A nation that realizes a 3 percent increase in its output per person is experiencing modern
economic growth.
TRUE

Blooms: Apply
90. Output per person has grown steadily since the beginning of the Roman Empire.
FALSE

Blooms: Remember
Difficulty: 1 Easy
91. China's GDP per person in 2011 was about one-third of U.S. GDP per person in the same
year.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6-87
92. Economists refer to purchases of stocks and bonds as "investment."
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
93. The amount of investment in an economy is ultimately limited by the amount of savings in
that economy.
TRUE

Blooms: Understand
94. Increasing investment in the present means forgoing future consumption.
FALSE

Blooms: Understand
6-88
95. A nation that wants to invest in more newly created capital in the present must be willing
to forgo present consumption.
TRUE

Blooms: Understand
96. Banks and other financial institutions provide the link between savers and economic
investors in the macroeconomy.
TRUE

Blooms: Understand
97. Economists believe that expectations have little impact on macroeconomic outcomes.
FALSE

Blooms: Remember
Difficulty: 1 Easy
6-89
98. Shocks occur when actual events do not match expectations.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
99. A demand shock occurs when large numbers of consumers unexpectedly reduce their
purchases of goods and services.
TRUE

Blooms: Apply
100. At the end of the summer driving season, the demand for gasoline typically declines. This
is an example of a negative demand shock.
FALSE

Blooms: Apply
6-90
101. Demand shocks may be positive or negative.
TRUE
AACSB: Analytic
Blooms: Understand
102. "Supply shocks" occur any time there is a change in the supply of goods and services.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
103. Economists believe that most short-run fluctuations in output are the result of supply
shocks.
FALSE

Blooms: Remember
Difficulty: 1 Easy
6-91
104. Demand shocks cause problems in the macroeconomy primarily because prices are
sticky.
TRUE

Blooms: Understand
105. In the very short run, demand shocks will tend to change the level of output but have little
effect on prices.
TRUE

Blooms: Understand
106. In the very short run, firms tend to respond to demand shocks by changing their prices.
FALSE

Blooms: Understand
6-92
107. Negative demand shocks have a more significant impact on output and employment when
prices are flexible.
FALSE

Blooms: Understand
108. In the short run, firms are more likely to respond to demand shocks by altering inventory
levels than by changing how much they produce.
TRUE

Blooms: Understand
109. Milk prices tend to be stickier than gasoline prices.
TRUE

Blooms: Remember
Difficulty: 1 Easy
6-93
110. Prices tend to be stickier in the shorter run than in the longer run.
TRUE

Blooms: Understand
111. Prices tend to be sticky partially because sellers know that consumers prefer stable
prices.
TRUE

Blooms: Understand
112. Prices tend to be more flexible when there are only two or three rival firms rather than a
large number of sellers in the market.
FALSE

Blooms: Understand
6-94
113. The "sticky price" model is the only one used by macroeconomists.
FALSE

Blooms: Remember
Difficulty: 1 Easy
114. (Consider This) The term "economic investment" refers only to money spent purchasing
newly created capital goods such as factories, tools, and warehouses.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
115. (Consider This) If a farmer purchases 10 acres of farmland from a neighboring farmer, this
would be considered an economic investment.
FALSE

Blooms: Apply
6-95
116. (Consider This) If Ford Motor Company purchases factory equipment previously used by
General Motors, this would be considered an economic investment.
FALSE

Blooms: Apply
6-96

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Macroeconomics 20th Edition McConnell Test Bank Download

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Test Bank for Macroeconomics 20th Edition

McConnell Brue Flynn 0077660773 9780077660772

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Multiple Choice Questions

1. Macroeconomics is mostly focused on:

A. the individual markets within an economy.

A. short-run fluctuations in output and employment and long-run economic growth.

3. The business cycle depicts:

A. fluctuations in the general price level.

4. The term "recession" describes a situation where:

A. inflation rates exceed normal levels.

5. Which of the following is most closely related to recessions?

A. Positive long-run economic growth.

7. Real GDP measures the:

A. Nominal and real GDP would both rise.

9. Real GDP is preferred to nominal GDP as a measure of economic performance because:

A. increased both nominal and real GDP from last year.

A. increased nominal GDP by $20,000 but left real GDP unchanged.

12. Why are high rates of unemployment of concern to economists?

A. Higher rates of unemployment generally lead to higher inflation rates.

13. Unemployment describes the condition where:

A. equipment and machinery are going unused.

15. Inflation is defined as:

A. an increase in the overall level of prices.

16. Why are economists concerned about inflation?

A. Inflation generally causes unemployment rates to rise.

A. real GDP, inflation, and unemployment.

A. real GDP over time.

19. Before the period of modern economic growth:

A. only civilizations such as the Roman Empire experienced economic growth.

A. Purchasing power parity.

A. Zimbabwe experiences a 5.6 percent increase in nominal GDP.

23. Savings are generated whenever:

A. prices are rising.

A. people are buying shares of corporate stock.

25. Which of the following would an economist consider to be investment?

A. Boeing building a new factory.

27. If an economy wants to increase its current level of investment, it must:

A. sacrifice future consumption.

28. Increased present saving:

A. comes at the expense of reduced current investment.

29. Banks and other financial institutions:

A. when expectations are unmet.

31. Shocks to the economy occur when:

A. stock prices rise by more than 10 percent per year.

32. Demand shocks:

33. Which of the following is an example of a demand shock?

A. occur more frequently than demand shocks.

35. Which of the following is an example of a supply shock?

A. A surge in consumer optimism prompts increased buying of goods and services.

36. When demand shocks lead to recessions, it is mainly due to:

A. reduce output in the long run.

The figure depicts a situation where:

A. prices are sticky, but output is flexible.

A. is highly susceptible to recessions and high unemployment.

The figure depicts a situation where:

A. prices are sticky, but output is flexible.

A. is highly susceptible to inflation.