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Glenn Hubbard Anthony Patrick O’Brien
Test Bank for Macroeconomics, 7th Edition R. Glenn

Hubbard Anthony Patrick O’Brien
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Macroeconomics 2019, 7e (Hubbard/O'Brien)
Chapter 10 Economic Growth, the Financial System, and Business Cycles
10.1 Long-Run Economic Growth
1) Which of the following statements describes the experiences of Chevron since it became
independent in 1911?
A) strong uninterrupted growth in demand
B) long-run growth interrupted by periods of business cycle recession
C) little or no growth in the long run, and unaffected by the business cycle
D) little or no growth in the long run, but very vulnerable to the business cycle
Answer: B
Diff: 1 Page Ref: 702/318
Topic: Long-Run Economic Growth
Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns
Special Feature: Chapter Opener: Economic Growth and the Business Cycle at Chevron
Corporation
2) Because of technological change, oil companies like Chevron were able to produce almost
twice as much output from refineries in 2016 as in 1950 while using 60 percent fewer workers.
This represents ________ in output per worker, which is also known as ________.
A) an increase; labor productivity
B) a decrease; structural unemployment
C) an increase; crowding out
D) a decrease; capital growth
Answer: A
Topic: Labor Productivity
AACSB: Analytical thinking
Special Feature: Chapter Opener: Economic Growth and the Business Cycle at Chevron
Corporation
3) Technological advances generally result in

A) decreased incomes.
B) increased life expectancy.
C) increased infant mortality rates.
D) increased average number of hours worked per day.
Answer: B
Diff: 1 Page Ref: 705-707/321-323
Topic: Determinants of Economic Growth
Special Feature: Apply the Concept: The Connection between Economic Prosperity and Health
1
Copyright © 2019 Pearson Education, Inc.
4) A good measure of the standard of living is
A) real GDP per capita.
B) nominal GDP per capita.
C) total real GDP.
D) total nominal GDP.
Answer: A
*: Recurring
5) Since 1900, real GDP per capita has ________ and this measure ________ the actual growth
in standards of living in the United States over this time.
A) increased; understates
B) increased; overstates
C) decreased; understates
D) decreased; overstates
Answer: A
*: Recurring
6) Since 1900, real GDP in the United States has grown

A) more rapidly than the population.
B) more slowly than the population.
C) as rapidly as the population.
D) in a random unpredictable manner relative to the population.
Answer: A
*: Recurring
2
7) If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2018, we
would say that in 2018, the average American could buy ________ times as many goods and
services as the average American in 1950.
A) 1/8
B) 4
C) 8
D) 12
Answer: C
*: Recurring
8) If real GDP in a small country in 2017 is $8 billion and real GDP in the same country in 2018
is $8.3 billion, the growth rate of real GDP between 2017 and 2018
A) is 3.0%.
B) is 3.6%.
C) is 3.75%.
D) cannot be determined from the information given.
Answer: C
Topic: Calculating Growth Rates
*: Recurring
9) If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate
of real GDP per capita?
A) 4.7%
B) 10.5%
C) 15%
D) 21%
Answer: A
Topic: The Rule of 70
*: Recurring
3
10) If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take
to double your money?
A) 1 year and 3 months
B) 2 years and 6 months
C) 8 years
D) 8 years and 9 months
Answer: D
*: Recurring
11) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years
required to double real GDP will decrease from
A) 23.3 years to 17.5 years.
B) 28.0 years to 21.0 years.
C) 11.2 years to 10.8 years.
D) 23.3 years to 20.6 years.
Answer: A
*: Recurring
Table 10-1
Real GDP (billions of

Year 2000 dollars)
2015 $8,700
2016 8,875
2017 9,000
2018 9,280
12) Refer to Table 10-1. Using the table above, what is the approximate growth rate of real GDP
from 2017 to 2018?
A) 1%
B) 2%
C) 3%
D) 4%
Answer: C
*: Recurring
4
13) Refer to Table 10-1. Using the table above, what is the approximate average annual growth
rate from 2015 to 2018?
A) 1%
B) 1.5%
C) 2%
D) 3%
Answer: C
*: Recurring
14) Increases in real GDP since 1900 can actually underestimate growth in the standard of living
for Americans since 1900 because
A) the level of pollution in 1900 was much higher than it is today.
B) the crime rate was higher in 1900 than it is today.
C) goods and services are more expensive today as compared to 1900.
D) the quality of health care that exists today was not available in 1900.
Answer: D
Diff: 2 Page Ref: 708-709/324-325
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15) Economist Robert Fogel has estimated that by the year 2040, individuals in the United States
will be spending
A) more time in the workforce and more time in leisure activities than they do today.
B) less time in the workforce and less time in leisure activities than they do today.
C) less time in the workforce and more time in leisure activities than they do today.
D) more time in the workforce and less time in leisure activities than they do today.
Answer: C
Diff: 1 Page Ref: 705-707/321-323
5
16) If real GDP grows by 3% in 2014, 3.2% in 2017, and 2.5% in 2018, what is the average
annual growth rate of real GDP?
A) 2.6%
B) 2.9%
C) 3.1%
D) 4.2%
Answer: B
*: Recurring
17) Countries with high rates of economic growth tend to have

A) a labor force that is more productive.
B) a lower life expectancy at birth.
C) low rates of technological advancement.
D) a declining incidence of business cycle fluctuations.
Answer: A
*: Recurring
18) According to the "Rule of 70," how many years will it take for real GDP per capita to double
when the growth rate of real GDP per capita is 5%?
A) less than 1 year
B) 5 years
C) 14 years
D) 35 years
Answer: C
*: Recurring
6
19) The quantity of goods and services that can be produced by one worker or by one hour of
work is referred to as
A) technology.
B) labor productivity.
C) real GDP.
D) human capital.
Answer: B
*: Recurring
20) Which of the following increases labor productivity?

A) an increase in the aggregate hours of work
B) decreases in the availability of computers and factory buildings
C) inventions of new machinery, equipment, or software
D) a decline in the health of the population
Answer: C
*: Recurring
Learning Outcome: Macro-4: Explain the sources of productivity growth
21) The total amount of physical capital available in a country is know as the country's
A) labor productivity.
B) savings.
C) investment.
D) capital stock.
Answer: D
*: Recurring
7
22) What two factors are the keys to determining labor productivity?
A) the business cycle and the growth rate of real GDP
B) the growth rate of real GDP and the interest rate
C) the level of technology and the quantity of capital per hour worked
D) the average level of education of the workforce and the price level
Answer: C
Diff: 1 Page Ref: 708-709/324-325
*: Recurring
23) If labor productivity growth slows down in a country, this will

A) accelerate the increase in real GDP per capita.
B) accelerate the increase in nominal GDP.
C) slow down the increase in real GDP per capita.
D) slow down the increase in nominal GDP.
Answer: C
Diff: 2 Page Ref: 708-709/324-325
*: Recurring
24) If labor productivity growth slows down in a country, this means that the growth rate in
________ has declined.
A) labor force participation
B) the quantity of goods or services that can be produced by one hour of work
C) the working-age population
D) nominal GDP
Answer: B
Diff: 2 Page Ref: 708-709/324-325
*: Recurring
8
Article Summary
According to the U.S. Department of Labor, nonfarm labor productivity rose at an
annualized rate of 0.9 percent in the second quarter of 2017 as hours worked and output
per worker both rose at their fastest pace in 18 months. Compared to the same quarter in
2016, productivity increased at a rate of 1.2 percent, its best performance in two years.,
while unit labor costs fell at a rate of 0.2 percent. From 2007 to 2016, labor productivity
increased at an average annual rate of 1.2 percent, well below its long-term growth rate of
2.1 percent from 1947 to 2016. This is an indication of a decline in the potential growth
rate, blamed in part on a shortage of workers and low capital expenditure.
Source: Lucia Mutikani, "U.S. productivity rises in second quarter, keeps labor costs in
check," reuters.com, August 9, 2017.
25) Refer to the Article Summary. In the second quarter of 2017, labor productivity in the
United States rose at its fastest pace in 18 months. Labor productivity is important for an
economy because an increase in labor productivity
A) will increase the labor force participation rate.
B) allows the average consumer to increase consumption.
C) will create short-run, but not long-run, economic growth.
D) will increase output and decrease wages in the long run.
Answer: B
Diff: 2 Page Ref: 708-709/324-325
Special Feature: Apply the Concept: U.S. productivity rises in second quarter, keeps labor costs
in check
26) Refer to the Article Summary. A slowdown in the growth rate of labor productivity, as
occurred from 2007-2016, will likely result in
A) an increase in real wages and an increase in the inflation rate.
B) a decrease in nominal wages and an increase in the inflation rate.
C) an increase in the country's potential growth rate.
D) a decline in the country's potential growth rate.
Answer: D
Diff: 2 Page Ref: 708-709/324-325
Special Feature: Apply the Concept: U.S. productivity rises in second quarter, keeps labor costs
in check
9
27) Which of the following is an example of human capital?
A) a computer
B) a factory building
C) a college education
D) a software program
Answer: C
*: Recurring
28) Human capital refers to which of the following?

A) the quantity of goods and services that can be produced by one worker or by one hour of
work
B) the accumulated knowledge and skills workers acquire from education and training or from
their life experiences
C) manufactured goods that are used to produce other goods and services
D) physical equipment that is made by human laborers, not machines
Answer: B
*: Recurring
29) Long-run economic growth requires all of the following except

A) technological change.
B) increases in capital per hour worked.
C) government provision of secure property rights.
D) political instability.
Answer: D
Diff: 1 Page Ref: 708-709/324-325
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10
30) Which of the following would contribute to a sustained high rate of economic growth in the
long run in an economy?
A) growth in capital per hour worked accompanied by technological change
B) increases in labor force participation rates as workers who are out of the labor force pursue
rising wages
C) a shift of workers in the economy from the agricultural sector to the nonagricultural sector
D) an influx of immigrant labor into an economy without any accompanying technological
change
Answer: A
*: Recurring
31) In terms of economic growth, the key measure of the standard of living is
A) real GDP.
B) nominal GDP.
C) real GDP per capita.
D) nominal GDP per capita.
Answer: C
Diff: 2 Page Ref: 709-710/325-326
Special Feature: Solved Problem: Where Does Productivity Come From?
32) India's rapid growth can be explained by

A) reduced regulations and market-based reforms.
B) investment in human capital from 1947 through 2017.
C) the movement of workers from the agricultural sector to the manufacturing sector.
D) an increase in labor force participation.
Answer: A
Diff: 2 Page Ref: 710-711/326-327
Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth?
11
33) Which of the following does not describe governmental policy actions that are helpful in
supporting growth in an economy? Governmental policies that
A) avoid playing any role in developing communication systems.
B) provide secure rights to private property.
C) establish an independent court system that enforces contracts.
D) facilitate the development of an efficient financial system.
Answer: A
*: Recurring
34) Potential GDP refers to

A) the level of GDP attained when all firms are producing at capacity.
B) the level of GDP attained by the country with the highest growth in real GDP in a given year.
C) the difference between the highest level of real GDP per quarter and the lowest level of real
GDP per quarter within any given year.
D) the extent to which real GDP is above or below nominal GDP.
Answer: A
Topic: Potential GDP
*: Recurring
35) Growth in potential GDP in the United States from 1949 to 2017 was estimated to be about
A) 8.25% per year.
B) 5.0% per year.
C) 3.2% per year.
D) 1.5% per year.
Answer: C
*: Recurring
12
36) Actual real GDP will be above potential GDP if
A) firms are producing below capacity.
B) firms are producing at capacity.
C) firms are producing above capacity.
D) inflation is rising.
Answer: C
*: Recurring
37) According to the "Rule of 70," it will take 4 years for real GDP per capita to double when the
growth rate of real GDP per capita is
A) 4 percent.
B) 12.25 percent.
C) 17.5 percent.
D) 28 percent.
Answer: C
*: Recurring
38) The only way the standard of living of the average person in a country can increase is if
________ increases faster than ________.
A) production; population
B) population; GDP per capita
C) population; production
D) population; income
Answer: A
*: Recurring
13
39) When production in an economy grows more quickly than the population in that economy,
which of the following must be occurring?
A) Real GDP is falling.
B) Incomes are growing at a slower rate than the population.
C) Real GDP per capita is rising.
D) Living standards are falling.
Answer: C
*: Recurring
40) Which of the following describes the growth in real GDP per person in the United States
from 1900 to the present?
A) It has decreased.
B) It has increased by more than eight times.
C) It has doubled.
D) It has increased twenty times.
Answer: B
*: Recurring
41) The best measure of the standard of living is

A) nominal GDP.
B) real GDP.
C) nominal GDP per capita.
D) real GDP per capita.
Answer: D
*: Recurring
14
42) According to Robert Fogel, economic growth ________ health, and health ________
economic growth.
A) improves; worsens
B) improves; improves
C) worsens; improves
D) worsens; worsens
Answer: B
Diff: 1 Page Ref: 705-707/321-323
43) Suppose that real GDP for 2017 was $10,000 billion and real GDP for 2018 was $11,000
billion. What is the rate of growth of real GDP between 2017 and 2018?
A) 1%
B) 2%
C) 5%
D) 10%
Answer: D
44) Suppose that real GDP for 2017 was $10,000 billion and real GDP for 2018 was $9,500
billion. What is the rate of growth of real GDP between 2017 and 2018?
A) -10%
B) -5%
C) -2%
D) -1%
Answer: B
15
45) If GDP grew 3% in 1970, 2.2% in 1971 and 2.5% in 1972 then, what is the average annual
growth rate over this period?
A) 5%
B) 4%
C) 2.6%
D) -2.2%
Answer: C
*: Recurring
Table 10-2
Real GDP (billions of

Year 2000 dollars)
2015 $10,100
2016 10,950
2017 11,425
2018 11,300
from 2016 to 2017?
A) 1%
B) 2%
C) 3%
D) 4%
Answer: D
from 2017 to 2018?
A) -2%
B) -1%
C) 1%
D) 2%
Answer: B
16
48) Refer to Table 10-2. Using the table above, what is the approximate average annual growth
rate from 2015 to 2018?
A) -1%
B) 1%
C) 2%
D) 4%
Answer: D
49) If GDP grows at a rate of 3% per year, approximately how long will it take for GDP to
double in size?
A) 12 years
B) 21 years
C) 23 years
D) 35 years
Answer: C
*: Recurring
50) If an economy is growing at a rate of 2.5% per year, how long will it take the economy to
double in size?
A) 60 years
B) 43 years
C) 36 years
D) 28 years
Answer: D
*: Recurring
17
51) The rule of 70 states that
A) it takes an economy 70 years to double its real GDP.
B) the number of years it takes an economy to double in size is 70 divided by the growth rate.
C) the number of years it takes an economy to double in size is the growth rate times 70.
D) the number of years it takes an economy to double in size is the growth rate divided by 70.
Answer: B
*: Recurring
52) If, between 2008 and 2018, the economy's real GDP grew from $20 billion to $40 billion,
what was the average annual growth rate in the economy?
A) 3%
B) 7%
C) 20%
D) 100%
Answer: B
53) If GDP is currently $13 trillion and is growing at a rate of 2.3% per year, how long will it
take GDP to reach $26 trillion?
A) about 15 years
B) about 17 years
C) about 25 years
D) about 30 years
Answer: D
*: Recurring
18
54) Labor productivity is
A) the quantity of output produced in one hour by several workers.
B) the quantity of capital one worker can produce in one day.
C) the quantity of output produced by one worker or by one hour of work.
D) the quantity of output produced in one hour by one machine.
Answer: C
*: Recurring
55) Labor productivity will increase if the ________ increases and ________.
A) quantity of capital per hour worked; technology improves
B) quantity of labor per unit of capital; technology improves
C) quantity of capital per hour worked; immigration increases while capital is fixed
D) quantity of labor per unit of capital; immigration increases while capital is fixed
Answer: A
Diff: 2 Page Ref: 708-709/324-325
*: Recurring
56) Workers in high-income countries have ________ to work with than do workers in low-
income countries.
A) less physical capital
B) more physical capital
C) more labor
D) more labor and less physical capital
Answer: B
*: Recurring
19
57) What is human capital?
A) a slang term for the underground labor market
B) manufactured goods that are used to produce other goods
C) accumulated knowledge and skills acquired by a worker
D) the manager or owner of a business
Answer: C
*: Recurring
58) Which of the following is most likely to be able to sustain economic growth in an economy?
A) sustained increases in the labor force participation rate
B) technological change
C) increases in capital per hour worked
D) accumulations of economic resources
Answer: B
*: Recurring
59) Which of the following will result in an increase in labor productivity?

A) a decrease in the number of people attending institutions of higher education
B) a decline in the amount of human capital per worker
C) an increase in technology
D) a decline in the capital stock per hour worked
Answer: C
*: Recurring
60) Potential GDP is defined as

A) the maximum of GDP that the economy can produce.
B) the amount of GDP produced if there is no frictional unemployment.
C) the level of GDP attained when all firms are producing at capacity.
D) the amount of GDP produced if there is no structural unemployment.
Answer: C
*: Recurring
20
61) Potential GDP was estimated to grow at a rate of 3.2% from 1949-2017 in the United States.
Actual GDP in the U.S.
A) always grows at a slower rate than potential GDP.
B) always grows at a faster rate than potential GDP.
C) always grows at the same rate as potential GDP.
D) is the same as potential GDP if all firms in the economy were working at capacity.
Answer: D
*: Recurring
62) Potential GDP in the United States

A) does not change over time.
B) grows as the economy grows.
C) changes over a given business cycle.
D) declines over time.
Answer: B
*: Recurring
63) Centrally planned economies tend to grow more quickly than market economies.
Answer: FALSE
Diff: 1 Page Ref: 708-709/324-325
*: Recurring
64) Accumulating a greater number of inputs will ensure that an economy will experience
economic growth.
Answer: FALSE
*: Recurring
21
65) Increases in capital per hour worked cannot sustain high rates of economic growth unless
accompanied by technological change.
Answer: TRUE
*: Recurring
66) Potential GDP is the maximum output a firm is capable of producing.

Answer: FALSE
*: Recurring
67) Potential GDP is always greater than real GDP in an economy.

Answer: FALSE
*: Recurring
68) The key to sustained economic growth is increasing labor productivity.

Answer: TRUE
Diff: 1 Page Ref: 708-709/324-325
*: Recurring
69) Market economies tend to grow more quickly than centrally-planned economies.
Answer: TRUE
Diff: 1 Page Ref: 704-705/320-321
*: Recurring
22
70) Economic growth depends more on technological change than on increases on capital per
hour worked.
Answer: TRUE
*: Recurring
71) How has economist Robert Fogel explained that economic growth is connected to life
expectancy? Based on this connection, in what country would you expect to have a longer life
expectancy, the United States or India? Explain.
Answer: According to Robert Fogel's research, countries with the lowest levels of GDP per
capita also have the shortest life expectancies. Technological advances in medicine, agriculture,
and water purification improve nutrition and increase incomes. Since economic growth in the
United States has historically been greater than that in India, we would expect U.S. residents to
have a longer life expectancy than residents of India. However, as India's economy begins to
grow more dramatically, life expectancy in India is rapidly approaching that of the United States.
Diff: 2 Page Ref: 705-707/321-323
72) What is labor productivity? How does a country's standard of living relate to labor
productivity?
Answer: Labor productivity refers to the amount of goods and services produced per worker. Per
capita real GDP increases only if labor productivity increases, so, increases in a country's
standard of living are tied to increases in labor productivity.
Diff: 1 Page Ref: 709-710/325-326
Special Feature: Solved Problem: Where Does Productivity Come From?
73) What factors increase potential GDP? Include a definition of potential GDP in your answer.
Answer: Potential GDP is the level of GDP attained when all firms are producing at capacity.
Growth in potential GDP is determined by growth in the labor force and the capital stock and by
technological change. Capital investments accompany growth in the labor force, encouraging
technological progress and increasing potential GDP.
*: Recurring
23
74) When potential GDP increases, is it necessarily the case that real GDP increases as well?
Explain.
Answer: An increase in potential GDP is a result of an expanding labor force, growth in the
capital stock, and technological change. The actual level of real GDP may be higher or lower
than potential GDP. If firms are all producing at capacity, we would expect potential GDP and
real GDP to be equal. If firms are producing below capacity, we would expect real GDP to be
below potential GDP. And if firms are temporarily producing above capacity, real GDP will be
above potential GDP.
*: Recurring
75) Explain why a centrally-planned economy might not grow as rapidly as a market economy.
Answer: Technological change is very important for growth. Simply accumulating inputs will
not ensure growth unless technological change occurs. This is essentially what happened in the
Soviet Union. The Soviet Union failed to enhance growth when it simply increased its capital to
labor ratio because it did not foster technological change at the same time. In a market economy,
entrepreneurs make decisions about employing technology and seeking innovations. If the
entrepreneur makes a correct decision, then he or she stands to make a large profit. In a centrally
planned economy, these decisions are made by managers employed by the government. If the
innovation works out, the manager may not reap any sort of benefit from it. Likewise, if the
innovation fails, the manager's financial position is unaffected. Because of this, managers
employed by the central government may be slower to adopt new technologies as compared to
entrepreneurs in a market economy. The profit incentive spurs entrepreneurs in market
economies to move more quickly.
Diff: 2 Page Ref: 708-709/324-325
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24
76) Suppose you are a famous international economic advisor. You have been asked to asses the
possibilities for growth in an African country. It is a country abundant in labor and some natural
resources. The capital-to-labor ratio is low. It has a free market economy. You have found that
this country does not have a very strong and healthy banking system, however the political
system is stable and the government does a good job protecting property rights. Assess this
country's prospects for growth. Recommend two things that would enhance the country's growth.
Answer: The prospects for this country's growth are fairly good. It has a lot of labor and natural
resources. Having abundant factors of production can contribute to strong growth. The free
market system is also another characteristic that should help enhance economic growth.
Entrepreneurs can respond quickly and adopt technological innovations. We know that
technological change can increase labor productivity. Also the fact that the government enforces
property rights can help the free market to flourish. The political stability of the government is
also a good sign. Investors won't be afraid to risk investing in the country. Two things the
country could do to increase growth would be to raise the capital-to-labor ratio and develop the
financial sector. The country could increase the capital-to-labor ratio by attracting foreign
investment, or perhaps giving tax breaks to firms that increase the amount they invest. This is
probably one of the most effective ways to increase growth.
Diff: 3 Page Ref: 708-709/324-325
*: Recurring
77) Outline the various actions the government sector could take to promote growth.
Answer: The government should secure private property rights. Private property rights are
crucial for a smoothly functioning market system. The government should create a court system
that will enforce contracts. It should also assist in the development of the country's financial
system. Additional endeavors include strengthening the education, communication, and
transportation systems.
Diff: 2 Page Ref: 709-710/325-326
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25
78) Use the rule of 70 to illustrate how small differences in growth rates can have a large impact
on how rapidly the standard of living in a country increases.
Answer: The rule of 70 refers to a calculation that determines, for a given growth rate, the
number of years it will take for real GDP to double in an economy. The formula is as follows:
Number of years to double = .
If the growth rate is 1%, it will take 70 years for GDP to double. If the growth rate is 2%, GDP
will double in 70/2 years = 35 years. A small increase in the growth rate (from 1% to 2%) cuts
the years it takes for the economy to double in half. If the growth rate is 5%, GDP will double in
14 years. So when the rate of growth jumps 3 more percentage points, GDP doubles in less than
half the time as when growth was 2%.
*: Recurring
79) The growth rate of real GDP in the United States rises from 4.2% to 4.4%. Explain and
calculate how this increase in the growth rate of real GDP affects the number of years it will take
for real GDP to double.
Answer: The "Rule of 70" states that the number of years it takes for GDP to double is equal to
70 divided by the growth rate of real GDP. Given this formula, at a growth rate of 4.2%, it will
take 70/4.2 = 16.67 years for GDP to double. If the growth rate increases by two-tenths of a
percent (to 4.4%), the number of years it will take for GDP to double will decrease to 70/4.4 =
15.9 years.
*: Recurring
10.2 Saving, Investment, and the Financial System
1) A firm can fund an expansion of its operations by

A) issuing bonds.
B) buying stock.
C) paying dividends.
D) loaning money.
Answer: A
Topic: Saving, Investment, and the Financial System
*: Recurring
Learning Outcome: Macro-5: Describe the key components and functions of a financial system
26
2) Liquidity refers to
A) the ease with a stock can be traded for a bond.
B) the ease with which a financial security can be traded for cash.
C) the number of times a dollar changes hands in the creation of GDP in an economy.
D) the number of shares of stock a corporation issues.
Answer: B
*: Recurring
3) Which of the following is most liquid?

A) a mutual fund share
B) a government bond
C) a corporate bond
D) a dollar bill
Answer: D
*: Recurring
4) Financial securities that represent promises to repay a fixed amount of funds are known as
A) bonds.
B) stocks.
C) pension funds.
D) insurance premiums.
Answer: A
*: Recurring
27
5) One difference between stocks and bonds is that
A) stocks are financial securities, while bonds are labor market securities.
B) stocks are usually issued in electronic form, while bonds are usually issued in paper form.
C) stocks represent ownership in companies, while bonds represent ownership in banks.
D) stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a
promise to repay the purchase price of the bond.
Answer: D
*: Recurring
6) In a closed economy, which of the following components of GDP is not included?

A) investment
B) government spending
C) net exports
D) consumption
Answer: C
Topic: Open and Closed Economies
*: Recurring
7) In a closed economy, which of the following equations reflects investment? (Y = GDP, C =

Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
A) Y - C - G
B) Y - C - T
C) Y - T + TR
D) C + G -T
Answer: A
*: Recurring
28
8) In a closed economy, private saving is equal to which of the following? (Y = GDP, C =
A) Y - C - T
B) Y - G - T
C) Y - G - T + TR
D) Y + TR - C - T
Answer: D
*: Recurring
9) In a closed economy, public saving is equal to which of the following? (Y = GDP, C =

A) Y - C - T
B) Y - G - T
C) T - G - TR
D) Y - C - T + TR
Answer: C
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29
Scenario 10-1
Consider the following data for a closed economy:
Y = $12 trillion
C = $8 trillion
I = $2 trillion
G = $2 trillion
TR = $2 trillion
T = $3 trillion
10) Refer to Scenario 10-1. Based on the information above, what is the level of private saving
in the economy?
A) $3 trillion
B) $4 trillion
C) $5 trillion
D) $8 trillion
Answer: A
*: Recurring
11) Refer to Scenario 10-1. Based on the information above, what is the level of public saving?
A) $0
B) $1 trillion
C) $2 trillion
D) negative $1 trillion (a deficit of $1 trillion)
Answer: D
*: Recurring
12) In a closed economy, public saving plus private saving is equal to

A) investment.
B) taxes minus transfers.
C) the budget surplus.
D) the budget deficit.
Answer: A
*: Recurring
30
13) Under which of the following circumstances would the government be running a deficit?
A) G = $5 trillion
T = $5 trillion
TR = $1 trillion
B) G = $5 trillion
T = $7 trillion
TR = $1 trillion
C) G = $7 trillion
T = $7 trillion
TR = $0
D) G = $7 trillion
T = $10 trillion
TR = $3 trillion
Answer: A
*: Recurring
31
14) Under which of the following circumstances would private saving be positive in a closed
economy?
A) Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
public saving = $1 trillion
B) Y = $9 trillion
C = $5 trillion
TR = $1 trillion
G = $1 trillion
C) Y = $8 trillion
C = $2 trillion
TR = $4 trillion
G = $2 trillion
D) Y = $6 trillion
C = $2 trillion
TR = $8 trillion
G = $3 trillion
Answer: A
*: Recurring
15) Given the following economic data, what is the value of investment in a closed economy?
Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
A) $2 trillion
B) $3 trillion
C) $5 trillion
D) cannot be determined without information on taxes (T)
Answer: B
*: Recurring
32
16) There is a government budget surplus if
A) T - TR > G.
B) G > T.
C) G > TR.
D) TR < T.
Answer: A
*: Recurring
17) If government saving is negative, then

A) T > TR.
B) G > T.
C) T - TR < G.
D) Y + TR < C - T.
Answer: C
*: Recurring
18) When the government runs a budget deficit, we would expect to see that
A) private saving will fall.
B) investment will fall.
C) G + TR < T.
D) public saving is positive.
Answer: B
*: Recurring
19) There is a federal budget deficit when

A) the government spends less that it collects in taxes.
B) the government spends more that it collects in taxes.
C) the government spends the same amount it collects in taxes.
D) taxes are too high.
Answer: B
*: Recurring
33
20) If government purchases are $400 million, taxes are $700 million, and transfers are $200
million, which of the following is true?
A) Public saving is $500 million.
B) The budget deficit is $100 million.
C) The budget deficit is $500 million.
D) Public saving is $100 million.
Answer: D
*: Recurring
21) Which of the following will increase investment spending in the economy, holding
everything else constant?
A) an increase in the federal government surplus
B) an increase in the budget deficit
C) an increase in consumer dissavings
D) an increase in transfer payments
Answer: A
*: Recurring
22) Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds.
A) demanders; suppliers
B) suppliers; demanders
C) suppliers; suppliers
D) demanders; demanders
Answer: A
Topic: Demand and Supply of Loanable Funds
*: Recurring
34
23) The demand for loanable funds is downward sloping because the ________ the interest rate,
the ________ the number of profitable investment projects a firm can undertake, and the
________ the quantity demanded of loanable funds.
A) lower; greater; greater
B) lower; smaller; greater
C) greater; greater; greater
D) greater; smaller; greater
Answer: A
*: Recurring
Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that
demand can be influenced
24) If Ebenezer Scrooge spends rather than saves his vast wealth, he will
A) slow economic growth because he is reducing the amount of funds available for investment.
B) slow economic growth because he is increasing the amount of funds available for investment.
C) promote economic growth because he is increasing the amount of funds available for
investment.
D) promote economic growth because he is decreasing the amount of funds available for
investment.
Answer: A
Special Feature: Apply the Concept: Ebenezer Scrooge: Accidental Promoter of Economic
Growth?
25) A government budget surplus from reduced government spending (no change in net taxes)
will ________ the level of investment in the economy and ________ the level of total saving
(private plus public) in the economy.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: B
Topic: Crowding Out
*: Recurring
35
26) If consumers decide to be more frugal and save more out of their income, then this will cause
A) a shift in the supply curve for loanable funds to the right.
B) a shift in the supply curve for loanable funds to the left.
C) a movement to the right along the supply curve for loanable funds.
D) a movement to the left along the supply curve for loanable funds.
Answer: A
*: Recurring
27) The Congressional Budget Office reported that federal budget deficits in the United States
were likely to increase during the next decade, and due to these higher deficits, "the nation's
capital stock ultimately would be smaller, and productivity and income would be lower than
would be the case if the debt was smaller." This higher budget deficit would be represented
graphically by
A) a shift in the supply curve for loanable funds to the right.
B) a shift in the supply curve for loanable funds to the left.
C) a movement to the right along the supply curve for loanable funds.
D) a movement to the left along the supply curve for loanable funds.
Answer: B
Diff: 1 Page Ref: 719-720/335-336
Special Feature: Solved Problem: Are Future Budget Deficits a Threat to the Economy?
28) An increase in the demand for loanable funds will occur if there is
A) an increase in the real interest rate.
B) a decrease in the real interest rate.
C) an increase in expected profits from firm investment projects.
D) an increase in the nominal interest rate accompanied by an equal increase in inflation.
Answer: C
*: Recurring
36
29) Which of the following would you expect to increase the equilibrium interest rate?
A) an increase in the percentage of income after net taxes that households save
B) an increase in the budget deficit
C) a decrease in the profitability of investment projects firms are considering
D) the government begins running a budget surplus
Answer: B
*: Recurring
Figure 10-1
30) Refer to Figure 10-1. Which of the following is consistent with the graph depicted above?
A) An expected recession decreases the profitability of new investment.
B) Technological change increases the profitability of new investment.
C) The government runs a budget surplus.
D) Households become spendthrifts and begin to save less.
Answer: B
*: Recurring
37
Figure 10-2
A) An expected expansion increases the profitability of new investment.
B) The government runs a budget surplus.
C) Investment spending is declining due to crowding out.
D) New government regulations decrease the profitability of new investment.
Answer: D
*: Recurring
38
Figure 10-3
A) The government begins running a budget surplus.
B) An expected recession decreases the profitability of new investment.
C) An increase in government spending crowds out private expenditures.
D) Technological change increases the profitability of new investment.
Answer: A
*: Recurring
39
Figure 10-4
33) Refer to Figure 10-4. Which of the following is consistent with the graph depicted?
A) an increase in household income
B) an increase in transfer payments to households
C) an increase in the proportion of income after net taxes used for consumption
D) an increase in tax revenues collected by the government
Answer: C
*: Recurring
34) In comparison to a government that runs a balanced budget, when the government runs a
budget deficit
A) the equilibrium interest rate will fall.
B) business investment will fall.
C) household savings will fall.
D) none of the above
Answer: B
Topic: Crowding Out
*: Recurring
Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
40
35) The response of investment spending to an increase in the government budget deficit is
called
A) expansionary investment.
B) private dissaving.
C) crowding out.
D) income minus net taxes.
Answer: C
Topic: Crowding Out
*: Recurring
Figure 10-5
36) Refer to Figure 10-5. "Crowding out" of firm investment as a result of a budget deficit is
illustrated by the movement from ________ in the graph above.
A) A to B
B) B to A
C) B to C
D) C to A
Answer: A
Diff: 2 Page Ref: 718-719/334-335
Topic: Crowding Out
*: Recurring
41
37) How will an increase in the government budget surplus as a result of lower government
spending (with no change in net taxes) affect private saving in the economy?
A) Private saving will increase by the amount of increase in the budget surplus.
B) Private saving will decrease by the amount of increase in the budget surplus.
C) Private saving will decrease by less than the amount of increase in the budget surplus.
D) Private saving will be unaffected by the increase in the budget surplus.
Answer: C
*: Recurring
38) The Congressional Budget Office reported that federal budget deficits in the United States
were likely to increase during the next decade, and due to these higher deficits, "the nation's
capital stock ultimately would be smaller, and productivity and income would be lower than
would be the case if the debt was smaller." This higher budget deficit could crowd out business
investment if it resulted in an increase in interest rates. Crowding out of business investment
would be represented graphically by a
A) a shift in the demand curve for loanable funds to the right.
B) a shift in the demand curve for loanable funds to the left.
C) a movement to the right along the demand curve for loanable funds.
D) a movement to the left along the demand curve for loanable funds.
Answer: D
Topic: Crowding Out
Special Feature: Solved Problem: Are Future Budget Deficits a Threat to the Economy?
39) Which of the following would encourage economic growth through increases in the capital
stock?
A) an increase in the profitability of new investment due to technological change
B) an increase in household saving
C) a decrease in the government deficit
D) all of the above
Answer: D
Diff: 2 Page Ref: 718-719/334-335
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42
40) If net taxes fall by $80 billion, we would expect
A) the government deficit to fall by $80 billion.
B) household saving to rise by $80 billion.
C) household saving to rise by less than $80 billion.
D) household saving to fall by more than $80 billion.
Answer: C
Diff: 3 Page Ref: 718-719/334-335
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41) Which of the following will not occur as the result of a decrease in net taxes?
A) decreased household saving
B) decreased government saving
C) a shift to the left of the supply curve for loanable funds
D) all of the above
Answer: A
Diff: 3 Page Ref: 718-719/334-335
*: Recurring
42) ________ are financial securities that represent partial ownership of a firm.
A) Stocks
B) Bonds
C) Treasury bills
D) Certificates of deposit
Answer: A
*: Recurring
43
43) ________ are financial securities that represent promises to repay a fixed amount of funds.
A) Stocks
B) Bonds
C) Interest rates
D) Mutual funds
Answer: B
*: Recurring
44) What is one difference between stocks and bonds?

A) Bonds earn a higher rate of return than stocks.
B) Stocks earn a higher rate of return than bonds.
C) Bonds are purchased at a bank, while stocks are purchased through the federal government.
D) Stocks represent partial ownership in a firm, while bonds do not.
Answer: D
*: Recurring
45) Which one of the following is not considered a financial intermediary?

A) a bank
B) a pension fund
C) an insurance company
D) a credit counselor
Answer: D
*: Recurring
46) ________ is the ease with which a financial security can be exchanged for money.
A) Risk
B) The face value
C) Liquidity
D) The rate of return
Answer: C
*: Recurring
44
47) Which of the following financial securities is most liquid?
A) a savings account
B) a share of stock
C) a cashier's check
D) a $20 bill
Answer: D
*: Recurring
48) Which of the following is not one of the key services provided by the financial system?
A) decreasing taxes
B) risk sharing
C) liquidity
D) generating information
Answer: A
*: Recurring
49) A financial intermediary's main function is to match ________ with excess funds to
________ with a shortage of funds.
A) savers; borrower
B) borrower; savers
C) governments; households
D) firms; insurance companies
Answer: A
*: Recurring
45
50) A country with no trade and no borrowing and lending relationships with other countries is
known as a(n)
A) planned economy.
B) market economy.
C) open economy.
D) closed economy.
Answer: D
*: Recurring
51) In a closed economy

A) I = Y - C - G.
B) I = Y + C - G.
C) I = Y - C + G.
D) I = Y + C + G.
Answer: A
*: Recurring
52) Private saving is defined as

A) Y + TR - C - T.
B) T + G + TR.
C) T - G + TR.
D) Y + TR + C - T.
Answer: A
*: Recurring
46
53) Public saving in the economy can be increased by
A) lowering taxes.
B) raising government spending.
C) raising taxes.
D) raising transfer payments.
Answer: C
*: Recurring
54) If real GDP in a closed economy is $40 billion, consumption is $20 billion, and government
purchases are $10 billion, what is investment?
A) $10 billion
B) $30 billion
C) $40 billion
D) $70 billion
Answer: A
*: Recurring
55) If, in a closed economy, real GDP is $30 billion, consumption is $20 billion, and government
purchases are $5 billion, what is total saving in the economy?
A) $5 billion
B) $15 billion
C) $45 billion
D) $55 billion
Answer: A
*: Recurring
47
56) In a closed economy, what is the relationship between saving and investment?
A) Saving is greater than investment.
B) Investment is greater than saving.
C) Investment is equal to saving.
D) Investment may be greater or smaller than saving.
Answer: C
*: Recurring
57) The sum of public and private saving in an economy is equal to

A) Y - C - T.
B) T - TR - G.
C) Y - C - G.
D) I - C - G.
Answer: C
*: Recurring
58) When the government runs a deficit, which of the following is true?
A) T > TR - G
B) G > T + TR
C) G > TR - T
D) T < G + TR
Answer: D
*: Recurring
59) If taxes are less than transfers plus government spending, then
A) there is positive saving.
B) there is a balanced budget.
C) there is a budget surplus.
D) there is public dissaving.
Answer: D
*: Recurring
48
60) There is public dissaving if
A) G + TR > T.
B) G + TR < T.
C) TR > G + T.
D) TR < G + T.
Answer: A
*: Recurring
61) Which of the following would increase public saving?

A) an increase in taxes
B) an increase in transfers
C) an increase in government purchases
D) All of the above would increase public saving.
Answer: A
*: Recurring
62) An increase in government purchases will

A) increase public saving.
B) increase the supply of loanable funds.
C) reduce investment.
D) reduce real GDP.
Answer: C
Topic: Crowding Out
*: Recurring
63) The budget deficit is defined as

A) T - (G + TR), and this is negative.
B) T - (G + TR), and this is positive.
C) T + (G - TR), and this is negative.
D) T + (G + TR), and this is negative.
Answer: A
*: Recurring
49
64) Which of the following statements about the budget deficit is true?
A) From 2007-2009, the federal budget was balanced.
B) In 2009, the budget deficit was a record $1.4 trillion.
C) In 2016, the federal budget was in surplus.
D) In 2017, the federal budget was balanced.
Answer: B
*: Recurring
65) The federal budget deficit can be reduced by

A) raising taxes.
B) raising government spending.
C) raising transfer payments.
D) higher interest rates.
Answer: A
*: Recurring
66) An increase in public saving has what impact on the market for loanable funds?
A) The supply of loanable funds increases.
B) The demand for loanable funds increases.
C) The supply of loanable funds decreases.
D) The demand for loanable funds decreases.
Answer: A
Diff: 1 Page Ref: 716-717/332-333
*: Recurring
50
67) The demand for loanable funds has a ________ slope because the lower the interest rate, the
________ number of investment projects are profitable, and the ________ the quantity of
loanable funds demanded.
A) negative; greater; greater
B) negative; greater; lesser
C) negative; lesser; greater
D) positive; lesser; lesser
Answer: A
*: Recurring
68) An increase in the real interest rate does which of the following?
A) reduces the demand for loanable funds
B) reduces saving
C) reduces consumption spending
D) increases the demand for loanable funds
Answer: C
*: Recurring
69) The demand for loanable funds is determined by the willingness of ________ to borrow
money to engage in new investment projects.
A) government
B) households
C) banks
D) firms
Answer: D
*: Recurring
51
70) Using the market for loanable funds, which of the following has the potential to raise the real
interest rate?
A) an increase in the demand for loanable funds
B) an increase in the quantity of loanable funds demanded
C) an increase in the supply of loanable funds
D) an increase in the quantity of loanable funds supplied
Answer: A
Diff: 1 Page Ref: 716-717/332-333
*: Recurring
71) An increase in the real interest rate results in which of the following?
A) an increase in the demand for loanable funds
B) a decrease in the demand for loanable funds
C) an increase in the quantity of loanable funds supplied
D) Both B and C will occur as a result of an increase in the real interest rate.
Answer: C
*: Recurring
72) A decrease in the real interest rate will

A) increase consumption and reduce investment.
B) increase saving and investment.
C) decrease investment and government spending.
D) increase consumption and investment.
Answer: D
*: Recurring
52
73) The supply of loanable funds has a ________ slope because the greater the interest rate, the
________ the reward to saving, and the ________ the quantity of loanable funds supplied.
A) positive; lesser; lesser
B) positive; greater; lesser
C) negative; lesser; greater
D) positive; greater; greater
Answer: D
*: Recurring
74) Equilibrium in the loanable funds market determines

A) the nominal interest rate.
B) the current interest rate.
C) the real interest rate.
D) the expected interest rate.
Answer: C
*: Recurring
75) If technological change increases the profitability of new investments for firms, then the
________ curve for loanable funds will shift to the ________.
A) supply; right
B) supply; left
C) demand; right
D) demand; left
Answer: C
*: Recurring
53
76) Because ________ in the government budget deficit increase the real interest rate, budget
deficits can ________ firm investment.
A) increases; increase
B) decreases; increase
C) decreases; decrease
D) increases; decrease
Answer: D
Topic: Crowding Out
*: Recurring
77) Economist Steve Landsburg has pointed out that Ebenezer Scrooge's change in behavior
from miser to spender might actually be detrimental to the economy because
A) Scrooge's miserly saving helped contribute to the production of investment goods rather than
consumption goods.
B) Scrooge was happiest when he was saving money, and happiness is the key to economic
growth.
C) saving has to be greater than consumption for the economy to grow.
D) Scrooge's consumption habits were more detrimental to the environment than were his earlier
saving habits.
Answer: A
Growth?
78) If technological change increases the profitability of new investment for firms, then the
________ curve for loanable funds will shift to the ________ and the equilibrium real interest
rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; right; rise
D) demand; left; fall
Answer: C
*: Recurring
54
Figure 10-6
79) Refer to Figure 10-6. The loanable funds market is in equilibrium, as shown in the figure
above. An increase in the supply of loanable funds could result in which of the following
combinations of the real interest rate and quantity of loanable funds at a new equilibrium?
A) The real interest rate is 5 percent, and the quantity of loanable funds is $150 million.
B) The real interest rate is 5 percent, and the quantity of loanable funds is $90 million.
C) The real interest rate is 3 percent, and the quantity of loanable funds is $150 million.
D) The real interest rate is 3 percent, and the quantity of loanable funds is $90 million.
Answer: C
Diff: 2 Page Ref: 718-719/334-335
*: Recurring
55
80) Refer to Figure 10-6. The loanable funds market is in equilibrium, as shown in the figure
above. As a result of an increase in the government budget deficit, the ________ for loanable
funds will ________, thereby ________ the equilibrium real interest rate and ________ the
equilibrium quantity of loanable funds.
A) demand; rise; increasing; decreasing
B) supply; rise; decreasing; increasing
C) demand; fall; decreasing; decreasing
D) supply; fall; increasing; decreasing
Answer: D
Diff: 3 Page Ref: 718-719/334-335
*: Recurring
81) Refer to Figure 10-6. The loanable funds market is given in the figure above. If the current
real interest rate is 5 percent, which of the following is true?
A) The loanable funds market is in equilibrium.
B) There is a surplus of loanable funds in the market.
C) There is a shortage of loanable funds in the market.
D) The quantity of loanable funds being demanded in the market is less than $90 million.
Answer: B
Diff: 1 Page Ref: 718-719/334-335
*: Recurring
82) Refer to Figure 10-6. The market is in equilibrium. If the government budget deficit rises,
which of the following would you expect to see?
A) The quantity of loanable funds demanded by firms will rise above $120 million.
B) The quantity of loanable funds demanded by firms will fall below $120 million.
C) The budget deficit will have no impact on the quantity of loanable funds demanded by firms.
D) The interest rate will fall below 4 percent.
Answer: B
Diff: 2 Page Ref: 718-719/334-335
*: Recurring
56
83) An increase in the government budget deficit will shift the ________ curve for loanable
funds to the ________ and the equilibrium real interest rate will ________.
Answer: B
Diff: 2 Page Ref: 718-719/334-335
*: Recurring
84) An increase in the government budget surplus will shift the ________ curve for loanable
funds to the ________ and the equilibrium real interest rate will ________.
Answer: A
Diff: 2 Page Ref: 718-719/334-335
*: Recurring
85) Which of the following will increase the real interest rate?
A) an increase in the supply of loanable funds
B) an increase in household saving
C) an increase in the demand for loanable funds
D) an increase in the budget surplus
Answer: C
Diff: 2 Page Ref: 718-719/334-335
*: Recurring
57
86) Countries without well-developed financial systems are able to sustain high levels of
economic growth.
Answer: FALSE
*: Recurring
87) In an open economy, the country interacts with other economies through both trading of
goods and services and borrowing and lending.
Answer: TRUE
*: Recurring
88) If there is public dissaving, investment spending in the economy will decline, holding
everything else constant.
Answer: TRUE
*: Recurring
89) An increase in the real interest rate will decrease consumption and investment.
Answer: TRUE
*: Recurring
90) Retained earnings are always sufficient to finance a firm's rapid expansion in a high-growth
economy.
Answer: FALSE
*: Recurring
58
91) Financial markets and financial intermediaries comprise the financial system.
Answer: TRUE
*: Recurring
92) The U.S. federal government has experienced dramatic swings in the state of its budget over
the past 20 years.
Answer: TRUE
Topic: Budget Deficits and Surpluses
*: Recurring
93) In an open economy, the relationship between GDP (Y) and expenditures is Y = C + I + G.
Answer: FALSE
*: Recurring
94) In 2003, Congress passed a tax cut that included a reduction in the marginal tax rate on stock
dividends. This essentially increased the after-tax rate of return on stocks that offer dividends.
Using the loanable funds market, describe what will happen to saving, investment, economic
growth, the real interest rate, and the quantity of loanable funds exchanged.
Answer: Dividends are the portion of corporate profits paid to shareholders. They are taxed like
other forms of income. When taxes on dividends are decreased, this raises the after-tax rate of
return on stocks that offer dividends. Because the return to saving would increase, saving will
increase and the supply of loanable funds will increase. The shift to the right by the supply curve
for loanable funds should lower the real interest rate and increase the quantity of loanable funds
exchanged. This will raise investment spending in the economy. As investment spending grows,
the capital stock and capital per hour worked should grow, and the rate of economic growth
should increase.
Diff: 3 Page Ref: 715-716/331-332
*: Recurring
59
95) Define the two categories of saving in the economy.
Answer: There are two categories of saving in the economy: private saving by households and
public saving by the government. Private saving is what is left of income after consumption
expenditures and income taxes. Public saving is the amount of tax revenue that the government
collects minus government expenditures and transfer payments.
*: Recurring
96) Briefly explain how the miserliness of Ebenezer Scrooge might actually be beneficial for
economic growth.
Answer: Ebenezer Scrooge is known for his unwillingness to spend money. Refusing to use his
money for consumption spending, Scrooge saves his money instead. This saving then becomes
available for firms to borrow to finance the building of new factories or research and
development. Since growth in the capital stock and technological advance are keys to economic
growth, the "stingy" Scrooge may actually promote economic growth.
Growth?
97) How does a decrease in the tax rate on income earned on saving affect saving, investment,
the interest rate, and economic growth?
Answer: One determinant of the amount of household saving is the interest rate or the after-tax
rate of return that households earn on the amount that they save. The higher the rate of return, the
more the household will save. Individuals care about the rate of return that they earn from saving
after taxes. Decreasing the tax rate on income earned from saving will increase the after-tax
return from saving.
Since the after-tax rate of return rises for every dollar invested, the supply of loanable funds
will increase, shifting the curve for loanable funds to the right. If the supply curve for loanable
funds shifts to the right, this will lower the interest rate. As the interest rate declines, more
investment projects become profitable. Firms will respond by increasing the amount of
investment. This will raise the amount of capital available per worker. As the capital-to-labor
ratio increases, so does labor productivity and growth in the economy.
Diff: 2 Page Ref: 714-716/330-332
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60
98) Explain why the demand curve for loanable funds has a negative slope.
Answer: The demand for loanable funds reflects the willingness of firms to borrow the money
that they need to launch new investment projects, such as building a new factory or overhauling
the equipment that they use for production. Most firms do not have the funds internally in
retained earnings to finance these projects, so they must borrow them. Firms undertake these
ventures in order to earn profit. Each of these projects has a rate of return. It is profitable for a
firm to undertake a project as long as the rate of return of the project exceeds the cost of
borrowing, or the interest rate. That is, if a firm expects to earn a 12% return on opening a new
factory, the project will be profitable if the firm can borrow the funds at a rate less than 12%. As
the interest rate falls, more investment projects become viable for the firm, so as the interest rate
falls, the quantity of loanable funds demanded rises because the firm requires more loanable
funds to invest in these newly profitable projects.
*: Recurring
99) Explain why increasing the government budget deficit can decrease investment spending.
Answer: Saving must equal investment in the economy; that is, S = I. Saving in the economy is
equal to the sum of private saving plus public saving or
S = Sprivate + Spublic, and because saving must equal investment we get:
I = Sprivate + Spublic.
Interpreting this expression, the larger saving is in the economy, the larger investment. One way
to increase saving is to increase public saving. Public saving is
Spublic = T - G - TR. The budget deficit is defined as the difference between taxes (T) and
government spending plus transfers. When the expression for public saving is negative, the
government is running a deficit. When this occurs, the total amount of saving in the economy
falls. Since the total amount of saving in the economy equals investment, investment falls.
*: Recurring
100) Use the equations for public and private saving to demonstrate how total saving in the
economy equals investment.
Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR.
Adding private saving and public saving together yields (Y + TR - C - T) + (T - G - TR) = Y - C -
G. In a closed economy (with no net exports), Y= C + I + G, so Y - C - G = I, and the sum of
public and private saving is equal to investment.
*: Recurring
61
101) Using equations for public and private saving, show that saving must equal investment in a
closed economy. Begin with the expression for total saving in the economy.
Answer: Start with the expression of total saving in the economy. This is the sum of private
saving and public saving:
S = Sprivate + Spublic (1)
where private saving is:
Sprivate = Y + TR - C - T. (2)
This states that private saving is what is left over from household income after consumption
expenditures (C) and taxes (T) are subtracted and transfers (TR) are added.
Public saving is:
Spublic = T - G- TR. (3)
Public saving is what is left over after government spending (G) and transfer payments (TR) are
subtracted from taxes (T).
Combining (2) and (3) into (1) we get
S = Y + TR - C - T + T - G- TR. Note that taxes and transfers cancel each other out leaving:
S = Y - C - G. (4)
Because we know that income (Y) is exactly equal to production or
Y = C + I + G in a closed economy, we can substitute the right hand side of this expression into
(4), and we get S = C + I + G - C - G. The consumption values cancel as does the level of
government spending, leaving S = I.
*: Recurring
102) Consider the following data for a closed economy:

a. Y = $12 trillion
b. C = $8 trillion
c. I = $3 trillion
d. TR = $2 trillion
e. T = $3 trillion
Use the data provided to calculate the level of private saving and the level of public saving and
demonstrate their relationship to investment.
Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR.
Plugging in the appropriate numbers for private saving, private saving = Y + TR - C - T = $12t +
$2t - $8t - $3t = $3 trillion. Using the identity for output in a closed economy, G = Y - C - I =
$12t - $8t - $3t = $1t, so public saving = $3t - $1t - $2t = $0. Adding together private saving of
$3 trillion and public saving of $0 yields saving of $3 trillion, which is exactly equal to
investment of $3 trillion.
*: Recurring
62
103) Explain and show graphically how a decrease in household saving affects the equilibrium
interest rate and the equilibrium quantity of loanable funds.
Answer: A decrease in household saving decreases the supply of loanable funds, shifting the
supply curve for loanable funds to the left, as shown below. The decrease in the supply of
loanable funds results in an increase in the equilibrium interest rate and a decrease in the
Diff: 2 Page Ref: 718-719/334-335

*: Recurring
63
104) Explain and show graphically how a decrease in government spending affects the
equilibrium interest rate and equilibrium quantity of loanable funds in the market for loanable
funds.
Answer: When government spending decreases, government saving (T - G - TR) rises. This
increase in government saving shifts the supply curve for loanable funds to the right, decreasing
the equilibrium interest rate and increasing the equilibrium quantity of loanable funds, as shown
below.
Diff: 2 Page Ref: 718-719/334-335

*: Recurring
64
105) Explain and show graphically how an increase in household saving affects the equilibrium
interest rate and the equilibrium quantity of loanable funds.
Answer: An increase in household saving increases the supply of loanable funds, shifting the
supply curve for loanable funds to the right, as shown below. The increase in the supply of
loanable funds results in a decrease in the equilibrium interest rate and an increase in the
Diff: 2 Page Ref: 718-719/334-335

*: Recurring
65
106) Explain and show graphically how government deficits can "crowd out" private investment.
Answer: When the government runs a deficit, public saving falls, reducing the supply of
loanable funds and shifting the supply curve for loanable funds to the left, as shown below. The
decrease in the supply of loanable funds results in an increase in the equilibrium interest rate and
a decrease in the equilibrium quantity of loanable funds, moving from point A to point B below.
As the equilibrium interest rate rises, the quantity of loanable funds demanded by firms for
investments in capital decreases. Increased government deficits raise interest rates, thereby
"crowding out" private investment by firms.
Diff: 2 Page Ref: 718-719/334-335

*: Recurring
66
107) Explain and show graphically how an increase in government spending affects the
equilibrium interest rate in the market for loanable funds.
Answer: When government spending increases, government saving (T - G - TR) falls. This
decrease in government saving shifts the supply curve for loanable funds to the left, increasing
the equilibrium interest rate as shown below.
Diff: 2 Page Ref: 718-719/334-335

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10.3 The Business Cycle
1) Which of the following explains why employment only rises at a slow pace at the end of a
recession?
A) Firms are hesitant to rehire laid off workers as they continue to operate below capacity.
B) Firms rapidly hire new workers at the first sign of an increase in demand for their goods.
C) Discouraged workers return to the labor force, and this makes the unemployment rate fall.
D) Discouraged workers leave the labor force, and this makes the unemployment rate rise.
Answer: A
Topic: The Effects of Recession on the Economy
*: Recurring
Learning Outcome: Macro-14: Identify different types and measures of unemployment and
discuss its causes
67
2) During the expansion phase of the business cycle, which of the following eventually
increases?
A) production
B) employment
C) income
D) all of the above
Answer: D
Topic: The Effects of Expansion on the Economy
*: Recurring
Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
3) During the recession phase of the business cycle

A) production is usually rising.
B) interest rates are usually falling.
C) unemployment is usually falling.
D) income is usually rising.
Answer: B
*: Recurring
4) The period between a business cycle peak and a business cycle trough is called
A) expansion.
B) recession.
C) diffusion.
D) recalculation.
Answer: B
Topic: Business Cycle
*: Recurring
68
5) From 1991 until 2001, the United States was in a period of
A) expansion.
B) recession.
C) business cycle troughs.
D) business cycle peaks.
Answer: A
*: Recurring
6) The period of expansion ends with a ________ and the period of recession ends with a
________.
A) business cycle peak; business cycle trough
B) business cycle trough; business cycle peak
C) business cycle peak; business cycle peak
D) business cycle trough; business cycle trough
Answer: A
*: Recurring
7) What is the name of the organization that defines business cycle peaks and troughs in the
United States?
A) the Bureau of Labor Statistics
B) the Federal Reserve
C) the National Bureau of Economic Research
D) the National Peak and Trough Committee
Answer: C
*: Recurring
8) As the economy nears the end of an expansion, which of the following do we typically see?
A) rising firm profits
B) rising levels of firm investment
C) rising interest rates
D) falling wages relative to output prices
Answer: C
*: Recurring
69
9) As the economy nears the end of a recession, which of the following do we typically see?
A) further decreases in consumer spending
B) increased spending on capital goods by firms
C) increasing interest rates
D) all of the above
Answer: B
*: Recurring
10) The demand for durable goods

A) has decreased over time.
B) declines by a greater percentage than does GDP during a recession.
C) declines by a smaller percentage than does GDP during a recession.
D) rises by a greater percentage than does GDP during a recession.
Answer: B
Topic: Business Cycle and Durable Goods
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11) Purchases of which of the following goods would be dramatically reduced during a
recession?
A) tomatoes
B) ink pens
C) gasoline
D) refrigerators
Answer: D
*: Recurring
70
12) During a recession, spending on ________ tends to fall more dramatically than spending on
________.
A) necessities; luxuries
B) durable goods; nondurable goods
C) nondurable goods; durable goods
D) food; cars
Answer: B
*: Recurring
13) Purchases of Huggies diapers should

A) remain fairly constant over the business cycle.
B) increase in recessions and decrease in expansions.
C) decrease in recessions and increase in expansions.
D) increase in recessions and remain constant in expansions.
Answer: A
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14) The effect of a recession on a company like General Motors Corporation is such that
A) sales decline more sharply for General Motors as compared to firms that do not produce
durable goods.
B) profits fall less sharply as compared to firms that do not produce durable goods.
C) the decline in sales is more short-lived as compared to firms that do not produce durable
goods.
D) there is no difference in the impact of the recession on its profits as compared to firms that do
not produce durable goods.
Answer: A
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71
15) Inflation tends to ________ during the expansion phase of the business cycle and ________
during the recession phase of the business cycle.
B) decrease; increase
C) decrease; decrease further
D) increase; increase further
Answer: A
*: Recurring
16) Which of the following is a correct statement?

A) Inflation is measured as the percentage change in the CPI.
B) The CPI is a widely used measure of the inflation rate.
C) Real GDP is our best measure of economic growth.
D) The PPI measures inflation as experienced by producers.
Answer: A
Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation
Rate
17) When the economy enters a recessionary phase of the business cycle, unemployment tends to
A) decrease.
B) increase.
C) be unchanged.
D) change in the same direction as the rate of inflation.
Answer: B
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72
18) Typically, as an economy begins to emerge from a recessionary phase of the business cycle
A) unemployment falls immediately.
B) unemployment continues to rise.
C) inflation begins to fall.
D) investment begins to fall.
Answer: B
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19) Since the 1950s

A) the United States has not experienced a business cycle.
B) U.S. business cycle fluctuations have becomes more volatile.
C) U.S. business cycle fluctuations have become milder.
D) U.S. business cycle fluctuations have not changed.
Answer: C
Topic: The Business Cycle Since the 1950s
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20) Since 1950, the average length of a recession in the United States has been
A) such that recessions barely exist.
B) less than a year.
C) between 1 and 2 years.
D) greater than 2 years.
Answer: B
*: Recurring
21) Since 1950, expansions in the United States have become ________, while recessions have
become ________.
A) longer; longer
B) shorter; shorter
C) shorter; longer
D) longer; shorter
Answer: D
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73
22) Which of the following explains why fluctuations in real GDP have become less volatile in
the United States since 1950?
A) Services have become a smaller fraction of GDP since the 1950s.
B) Unemployment insurance and other government transfer programs are more prevalent since
the 1950s.
C) The government has become more reluctant to intervene when real GDP declines and
unemployment rises since the 1950s.
D) both B and C
Answer: B
*: Recurring
23) Most economists believe that the return of ________ during the 2007-2009 recession is a key
reason why the recession was so severe.
A) high tariffs
B) financial instability
C) rapid inflation
D) high interest rates
Answer: B
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24) According to the National Bureau of Economic Research, the United States has experienced
________ recessions since 1950.
A) 4
B) 7
C) 10
D) 15
Answer: C
74
25) According to the National Bureau of Economic Research, the recession that began in
December 2007
A) lasted 12 months.
B) lasted 18 months.
C) lasted 27 months.
D) did not end until December 2011.
Answer: B
*: Recurring
26) During the expansion phase of the business cycle

A) production increases.
B) employment decreases.
C) income decreases.
D) unemployment increases.
Answer: A
*: Recurring
27) A period of expansion in the business cycle ends when

A) real GDP is equal to potential GDP.
B) the business cycle reaches its peak.
C) the business cycle reaches its trough.
D) real GDP is less than potential GDP.
Answer: B
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75
28) When the economy reaches a trough in a business cycle, which of the following will occur?
A) Income, production, and employment will continue to fall.
B) Income, production, and employment will begin to rise.
C) Income and production will rise, but employment will continue to fall.
D) Employment rises, but income and production will continue to fall.
Answer: B
*: Recurring
29) The Business Cycle Dating Committee, a part of the ________, officially decides when a
recession begins and ends.
A) federal government
B) Bureau of Labor Statistics
C) National Bureau of Economic Research
D) Federal Reserve
Answer: C
Topic: Defining a Recession
*: Recurring
30) A(n) ________ comes to an end with a business cycle ________.

A) recession; peak
B) recession; trough
C) expansion; trough
D) expansion; bubble
Answer: B
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76
31) The Business Cycle Dating Committee defines a recession as
A) two consecutive quarters of declining real GDP.
B) two consecutive quarters of declining nominal GDP.
C) a significant decline in activity visible in industrial production, employment, real income, and
wholesale/retail trade lasting more than a few months.
D) a significant decline in inflation and unemployment lasting more than a few months.
Answer: C
*: Recurring
32) As the economy nears the end of an expansion, interest rates usually ________ and wages
rise more ________ than prices.
A) rise; rapidly
B) rise; slowly
C) fall; rapidly
D) fall; slowly
Answer: A
*: Recurring
33) A recession often begins with a(n) ________ in spending by firms on capital goods and a(n)
________ in spending on durable goods by households.
B) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: D
*: Recurring
77
34) Which of the following goods would see the largest decline in demand during a recession?
A) automobiles
B) food
C) clothing
D) haircuts
Answer: A
*: Recurring
35) When a recession ends

A) interest rates decrease.
B) households decrease spending on durable goods.
C) the household sector decreases spending substantially.
D) firms increase the amount of borrowing.
Answer: D
*: Recurring
36) For the recessions in the United States since the 1950s
A) cyclical unemployment has been non-existent.
B) unemployment rises on average by about 1.2 percentage points during the 12 months after a
recession begins.
C) unemployment falls on average by 2 percentage points during the 12 months after a recession
begins.
D) unemployment rises on average about 5 percentage points during the 12 months after a
recession begins.
Answer: B
*: Recurring
Learning Outcome: Macro-14: Identify different types and measures of unemployment and
discuss its causes
78
37) For the recessions in the United States since the 1950s
A) inflation has been nonexistent.
B) the inflation rate rises on average by about 2.5 percentage points 12 months after a recession
begins.
C) the inflation rate falls on average by about 2.5 percentage points 12 months after a recession
begins.
D) deflation occurs.
Answer: C
*: Recurring
Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and
deflation
38) Recessions typically cause the unemployment rate to ________ and the inflation rate to
________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
*: Recurring
39) During an expansion, how do inflation and unemployment typically change?

A) Inflation and unemployment both rise.
B) Inflation and unemployment both fall.
C) Inflation falls and unemployment rises.
D) Inflation rises and unemployment falls.
Answer: D
*: Recurring
79
40) Between 1950 and 2009, the average length of recessions in the United States was
A) 11 months.
B) two years.
C) three months.
D) eighteen months.
Answer: A
*: Recurring
41) Inflation is measured

A) using the level of the consumer price index.
B) as the percentage change in the consumer price index.
C) using the level of real GDP.
D) as the percentage change in real GDP.
Answer: B
*: Recurring
deflation
42) If the CPI is currently 202, what does this tell you about inflation between last year and this
year?
A) There was deflation in the economy between this year and last year.
B) Inflation in the economy between this year and last year was 2%.
C) Inflation in the economy between this year and last year was 102%.
D) The CPI measures only the level of prices in a given year, not the percentage change in prices
from one year to the next.
Answer: D
deflation
Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation
Rate
80
43) From 1950 - 2007, recessions in the United States
A) did not occur.
B) became more severe than before 1950.
C) became less severe than before 1950.
D) were about as severe as they were before 1950.
Answer: C
Diff: 1 Page Ref: 726-727/342-343
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44) Since 1950

A) economic expansions in the United States have been so short that expansions barely exist.
B) the average length of expansions in the United States have become shorter as compared to
before 1950.
C) the average length of expansions in the United States have become longer as compared to
before 1950.
D) the average length of expansions in the United States are about the same length as compared
to before 1950.
Answer: C
Diff: 1 Page Ref: 726-727/342-343
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45) Which of the following is not a reason why the U.S. economy has been more stable since
1950?
A) Goods have become a larger fraction of GDP and services have become a smaller fraction of
GDP.
B) The government has actively pursued policy to combat recessions and prolong expansions.
C) Unemployment insurance and other government programs curtail the decline in spending that
occurs during a recession.
D) Services have become a larger fraction of GDP and goods have become a smaller fraction of
GDP.
Answer: A
Diff: 2 Page Ref: 726-727/342-343
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81
46) Which of the following indicates that the U.S. economy has become more stable since 1950?
A) longer recessions
B) shorter expansions
C) less severe fluctuations in real GDP
D) All of the above indicate that the U.S. economy has become more stable since 1950.
Answer: C
Diff: 2 Page Ref: 726-727/342-343
*: Recurring
47) The economic effects of a recession are likely to have the smallest impact on the sales of
which of the following businesses?
A) an automobile manufacturer
B) a furniture store
C) a fast-food restaurant
D) a home builder
Answer: C
Special Feature: Economics in Your Life & Career: Should Your Business Be Cautious at the
Beginning of a Recession?
48) Which of the following is a true statement about the length of recessions and expansions in
the United States economy?
A) Prior to 1900, the length of expansions equaled the length of recessions.
B) Prior to 1900, the length of expansions were much less than the length of recessions.
C) Prior to 1900, the length of expansions were much longer than the length of recessions.
D) Prior to 1900, the length of recessions were brief and almost nonexistent.
Answer: A
Diff: 1 Page Ref: 727-728/343-344
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82
49) Which of the following is a true statement about the length of recessions and expansions in
the United States economy?
A) After 1950, the length of expansions equaled the length of recessions.
B) After 1950, the length of expansions were much less than the length of recessions.
C) After 1950, the length of expansions were much longer than the length of recessions.
D) After 1950, the length of expansions were brief and almost nonexistent.
Answer: C
Diff: 1 Page Ref: 727-728/343-344
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50) Cutting costs at the beginning of a recession tends to make the most sense for a business that
produces or provides
A) services.
B) durable goods.
C) nondurable goods.
D) goods and services for export.
Answer: B
Special Feature: Economics in Your Life & Career: Should Your Business Be Cautious at the
Beginning of a Recession?
51) Economists have not found a way to predict when recessions will begin and end.
Answer: TRUE
*: Recurring
52) The NBER's Business Cycle Dating Committee defines a recession as at least two
consecutive quarters of falling real GDP.
Answer: FALSE
*: Recurring
83
53) At the end of an expansion, wages of workers are usually rising faster than prices.
Answer: TRUE
*: Recurring
54) In the United States, the average length of expansions from 1950 to 2009 was more than
twice as long than they were from 1900 to 1950.
Answer: TRUE
*: Recurring
55) The lengths of the recession and expansion phases and which sectors of the economy are
most affected will rarely be the same in any two business cycles.
Answer: TRUE
*: Recurring
56) A period of economic expansion ends with a business cycle trough.

Answer: FALSE
*: Recurring
57) The U.S. economy experienced a period of relative stability from 1950-2007.
Answer: TRUE
*: Recurring
84
58) Inflation usually increases during a recession and decreases during an expansion.
Answer: FALSE
*: Recurring
deflation
59) Explain how unemployment changes over the business cycle. Why do these changes occur?
Answer: Unemployment will fall during an expansion and rise during a recession. When the
economy begins slowing down during a recession, firms cut back on production and workers get
laid off. But it doesn't stop there. The unemployment rate typically rises even after the end of the
recession. This happens for a couple of different reasons. First, it reflects the behavior of
discouraged workers. When the economy goes into recession, the number of discouraged
workers rises. When a discouraged worker drops out of the labor force, this actually lowers the
unemployment rate. During the recession, the unemployment rate does not rise as much as it
would if we counted discouraged workers as unemployed. When the recovery begins, these
former discouraged workers enter back into the labor force and start searching for work again.
This influx of people without jobs into the labor force raises the unemployment rate.
Second, firms are reluctant to start adding back workers when the recovery begins to take
hold. They are cautious and want to be sure that the recession is over. They work their workers
overtime rather than add new workers. Both these effects, discouraged workers re-entering the
labor market and firm's reluctance to hire in the early part of a recovery, contribute to keeping
the unemployment rate high.
*: Recurring
60) How are unemployment, inflation, and the business cycle related?
Answer: A recessionary phase of a business cycle usually begins with decreased investment
spending by firms or with reductions in consumption spending. As spending decreases firms'
sales decrease, and firms begin laying off workers, thereby increasing unemployment. As firms
find it more difficult to sell their goods they will also find it more difficult to raise prices and the
rate of inflation will be relatively low. As the economy moves toward the expansionary phase of
the business cycle firms begin to increase investment spending, households begin to increase
their spending, and unemployment begins to fall. As spending increases producers find it easier
to raise prices and the rate of inflation tends to rise during this expansionary phase.
Diff: 2 Page Ref: 725-727/341-343
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85
61) How have government policies and programs affected the volatility of the business cycle in
the United States since 1950? Explain and provide at least two specific examples of policies or
programs that may have had an impact.
Answer: Government programs like unemployment insurance and Social Security have helped
to shorten recessions since they provide additional income to individuals who might not
otherwise be able to continue consumption spending. Since the Great Depression the federal
government has also become more actively committed to maintaining low unemployment, which
may have reduced the severity of recessions and prolonged expansions.
Diff: 2 Page Ref: 727-728/343-344
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62) Suppose you are an advisor to the Business Cycle Dating Committee. You are asked to look
at macroeconomic data to evaluate whether the economy has entered a recession this year.
Which data do you look at? How does the economy behave at the onset of a recession?
Answer: Since a recession is defined as significant decline in economic activity, I would look at
data that would indicate this decline. The data that illustrates economic activity is GDP, real
income, and employment. I might also look for declines in spending on the part of households
and firms, paying attention to durable goods sales, capital goods sales, and wholesale and retail
sales.
A recession usually begins with a decline in spending on the part of households and/or firms.
Firms start to buy less capital goods, equipment, machinery, tools, and buildings. Purchases of
durable goods by households, such as appliances and cars, also begin to decline. Purchases of
houses begin to slow. This slowdown in spending causes firms that produce capital goods,
consumer durables, and houses to cut back on producing these items. They begin to lay off
workers. Income declines as profits fall and workers who are laid off are no longer being paid.
This drop in income leads to further declines in spending, and other firms start to cut back on
production and lay workers off. The economy moves into recession.
Diff: 3 Page Ref: 722-723/338-339
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86
63) What type of consumer goods is more affected by the business cycle: durable goods or
nondurable goods? Why?
Answer: Some workers lose income during a recession and cut back on their spending. Other
workers fear losing their jobs or may suffer wage cuts. These workers also reduce their spending.
When they cut back on their spending, workers are more likely to cut back on consumer durable
goods. Consumer durable goods such as automobiles, appliances, and furniture are goods that are
expected to last for three or more years. Since these goods last three or more years, the consumer
can continue to use these goods for some time. The consumer will put off trying to replace these
expensive goods, until his/her income position is stronger and job security more assured.
Diff: 2 Page Ref: 723-724/339-340
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64) Describe what happens to inflation during the business cycle. Give an intuitive explanation
as to why inflation changes the way it does over the business cycle.
Answer: Inflation will rise during an expansion and fall during a recession. Inflation usually
rises near the end of an expansion. Recessions consistently lower the inflation rate. The average
decline in the inflation rate has been about 2.5 percentage points during U.S. recessions since
1950. The business cycle has this effect on inflation because spending is usually strong during an
expansion and firms will find it easier to raise prices. During a recession the opposite is true.
Spending by firms and households is weak and firms might not be able to sell their goods if they
aggressively raise prices.
*: Recurring
deflation
87
Test Bank for Macroeconomics, 7th Edition R. Glenn Hubbard Anthony Patrick O’Brien
65) Give three reasons why the U.S. economy was more stable from 1950-2007 than it was prior
to 1950.
Answer: Any three of the following four reasons are correct.
First, our economy changed over time in terms of the types of goods produced. We produce
more services today and less goods than we did in the past. Manufacturing production used to
account for 40 percent of GDP, now it accounts for 12 percent. Manufacturing production
fluctuates more over the business cycle. Durable goods manufacturing is extremely volatile.
GDP is relatively more stable because service production is more stable over the business cycle
and we produce more services now.
Second, government safety-net programs such as unemployment insurance and Social
Security give workers more income during recessions. These programs did not exist to the extent
that they exist in the post-World War II U.S. economy. The extent of the downturn tends to be
less severe as these workers who take advantage of these programs do not have to curtail their
spending as much as they would if the programs did not exist. The additional spending may have
the effect of shortening recessions since 1950.
Third, prior to 1930, the government did not pursue policies to shorten recessions or prolong
expansions. After the Great Depression, public opinion changed towards favoring the
government pursuing active policy. The government has actively implemented fiscal and
monetary policies to smooth out the business cycle, shortening recessions and prolonging
expansions. Many economists believe that these policies stabilized the economy. However, it is
not a settled issue as other economists disagree.
Fourth, the severity of the Great Depression of the 1930s was caused in part by instability in
the financial system. The financial system became much more stable following the end of the
Great Depression, although the return of financial instability during the 2007-2009 recession is
likely a key reason for the severity of the recession.
*: Recurring
88
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10.1 Long-Run Economic Growth

3) Technological advances generally result in

6) Since 1900, real GDP in the United States has grown

Real GDP (billions of

17) Countries with high rates of economic growth tend to have

20) Which of the following increases labor productivity?

23) If labor productivity growth slows down in a country, this will

28) Human capital refers to which of the following?

29) Long-run economic growth requires all of the following except

32) India's rapid growth can be explained by

34) Potential GDP refers to

41) The best measure of the standard of living is

Real GDP (billions of

59) Which of the following will result in an increase in labor productivity?

60) Potential GDP is defined as

62) Potential GDP in the United States

66) Potential GDP is the maximum output a firm is capable of producing.

67) Potential GDP is always greater than real GDP in an economy.

68) The key to sustained economic growth is increasing labor productivity.

Number of years to double = .

10.2 Saving, Investment, and the Financial System

1) A firm can fund an expansion of its operations by

3) Which of the following is most liquid?

6) In a closed economy, which of the following components of GDP is not included?

7) In a closed economy, which of the following equations reflects investment? (Y = GDP, C =

9) In a closed economy, public saving is equal to which of the following? (Y = GDP, C =

Consider the following data for a closed economy:

12) In a closed economy, public saving plus private saving is equal to

17) If government saving is negative, then

19) There is a federal budget deficit when

44) What is one difference between stocks and bonds?

45) Which one of the following is not considered a financial intermediary?

51) In a closed economy

52) Private saving is defined as

57) The sum of public and private saving in an economy is equal to

61) Which of the following would increase public saving?

62) An increase in government purchases will

63) The budget deficit is defined as

65) The federal budget deficit can be reduced by

72) A decrease in the real interest rate will

74) Equilibrium in the loanable funds market determines

102) Consider the following data for a closed economy:

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10.3 The Business Cycle

3) During the recession phase of the business cycle

10) The demand for durable goods

13) Purchases of Huggies diapers should

16) Which of the following is a correct statement?

19) Since the 1950s

26) During the expansion phase of the business cycle

27) A period of expansion in the business cycle ends when

30) A(n) ________ comes to an end with a business cycle ________.

35) When a recession ends

39) During an expansion, how do inflation and unemployment typically change?

Glenn Hubbard Anthony Patrick O’Brien

30) A(n) comes to an end with a business cycle .