Econ 110 Exam #3 Quizzes

Which of the following statements is true?

A.) Cyclical unemployment is the unemployment that occurs as an economy goes through contractionary periods of the business cycle.

B.) Frictional unemployment occurs when people switch jobs or when firms go out of business, causing people to be unemployed for a short duration.

C.) Structural unemployment refers to people being unemployed because they don't possess the skills firms are looking for.

D.) The natural rate of unemployment includes frictional unemployment and a small component of cyclical unemployment.

E.) All of the above statements are true.
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Which of the following statements is true?

A.) Cyclical unemployment is the unemployment that occurs as an economy goes through contractionary periods of the business cycle.

B.) Frictional unemployment occurs when people switch jobs or when firms go out of business, causing people to be unemployed for a short duration.

C.) Structural unemployment refers to people being unemployed because they don't possess the skills firms are looking for.

D.) The natural rate of unemployment includes frictional unemployment and a small component of cyclical unemployment.

E.) All of the above statements are true.
E.) All of the above statements are true.
In 2020, per capita GDP in Canada was about $42,000. What will Canada's per capita GDP be in 25 years if Canada experiences 3.5% annual growth on average over that time period?


A.) $1,086,750

B.) $43,470

C.) $84,213

D.) $234,567

E.) $99,256
E.) $99,256
Which of the following is the best way to describe the labor force participation rate in the United States?


A.) The labor force participation rate is the percent of all people in the labor force who are employed.

B.) The labor force participation rate is the percent of all people who are aged 16 or older.

C.) The labor force participation rate is the percent of all people aged 16 and older who are in the labor market by either being employed or unemployed.

D.) The labor force participation rate is the percent of all people aged 16 or older who are employed.

E.) The labor force participation rate is the percent of all people aged 16 and older who are employed or in school.
C.) The labor force participation rate is the percent of all people aged 16 and older who are in the labor market by either being employed or unemployed.
Which of the following statements about unemployment is NOT true?


A.) Most people who become unemployed find a new job within 6 months.

B.) Discouraged workers are people who don't have a job and would like a job but have stopped searching for a job because they think a search would be futile.

C.) To be unemployed, one must be without a job but also actively looking for a job.

D.) The unemployment rate in the United States has been in the range of 4% to 6% for much of the last 40 years.

E.) Trends in the unemployment rate depend on how one calculates the unemployment rate (e.g., U-1 vs. U-3 vs. U-6).
E.) Trends in the unemployment rate depend on how one calculates the unemployment rate (e.g., U-1 vs. U-3 vs. U-6).
Which of the following is true regarding typical job flows in the U.S. labor market?


A.) Between 250,000 and 450,000 people start a new job in a typical month of an expansion.

B.) It typically takes 5 to 10 years for all of the jobs lost in a recession to be regained.

C.) Between 4 million and 6 million people start a new job in a typical month.

D.) Over the last 50 years, the labor force participation rate of mem has held constant while the labor force participation rate of women has steadily increased.

E.) In the first two months of Covid (March and April of 2020), about 28 million Americans lost their job. As a result, the unemployment rate increased to about 25%, and stayed there for over 6 months.
C.) Between 4 million and 6 million people start a new job in a typical month.
Which of the following is NOT a problem with the idea of the government calculating a price level for the economy?


A.) Prices are not constant across geographical locations.

B.) Households can adjust their purchasing patterns over time to minimize the effect of facing higher prices on some goods.

C.) It is difficult to account for changes in the quality of a product over time.

D.) Difference households desire different baskets of goods.

E.) All of the above are potential problems when calculating a price level.
E.) All of the above are potential problems when calculating a price level.
Which of the following is NOT a component of aggregate income?


A.) Income Taxes

B.) Profit

C.) Compensation

D.) Rents

E.) Interest Payments
A.) Income Taxes
Which of the following is the standard formula for GDP?


A.) Y = C + I + G + (M - X)

B.) Y = C + I + G + (X - M)

C.) Y =C + (I - S) + (G - T) + (X - M)

D.) Y = C + I + G + X

E.) Y = C + I + (G - T) + (X - M)
B.) Y = C + I + G + (X - M)
When calculating real values, dollar amounts are converted to a base year unit of measure. Typically, the price level (i.e., the cost of the basket of goods) is assumed to equal 100 in the base year. As such, which of the following statements is true?


A.) Any year for which the price index exceeds 100 is associated with lower prices compared to the base year.

B.) Any year for which the price index exceeds 100 is associated with higher prices compared to the base year.

C.) The base year must be the first year of data (i.e., the oldest year of data).

D.) Any year for which the price index is below 100 is associated with higher prices compared to the base year.

E.) The base year must be the most recent year of data.
B.) Any year for which the price index exceeds 100 is associated with higher prices compared to the base year.
Consider a price index with a value of 180.0 in 2016 and and 186.3 in 2017. The base year for this particular price index is 1996, at which time the price index was set to 100. How much inflation occurred between 2016 and 2017?


A.) -6.3%

B.) 3.0%

C.) 3.5%

D.) 6.3%

E.) 2.4%
C.) 3.5%
Consider a graph that includes both nominal GDP and real GDP. Which of the following statements is true? A.) The base year for the series of real values is determined by the point of intersection of the nominal and real curves. B.) The real graph must always be above the nominal graph if the economy has always experienced deflation. C.) The real graph must always be below the nominal graph if the economy has always experienced inflation. D.) The real graph and the nominal graph must both start and end in the same place. E.) The graph of real values must be increasing if the graph of nominal values is increasing.A.) The base year for the series of real values is determined by the point of intersection of the nominal and real curves.The CPI was 161.6 in 1997, and was 296.8 in 2022. The American Economic Association reported in 1997 that the average starting salary of a newly minted economist Ph.D. was $62,000. The AEA also reported that the average starting salary of a newly minted economics Ph.D. was $134,000 in 2022. Which statement comparing these two statistics is true? A.) When comparing which real value is higher -- real 1997 average salary vs. real 2022 average salary -- the result will not depend on the base year chosen. B.) Real wages for newly minted economics Ph.D.s increased from 1997 to 2022. C.) The real average salary for newly minted economics Ph.D.s in 1997 measured in 2022 dollars was $113,871. D.) The real average salary for newly minted economics Ph.D.s in 2022 measured in 1997 dollars is $72,960 E.) All of the above are true statements.E.) All of the above are true statements.The CPI was 218.1 in 2010 and it was 258.8 in 2020. Jane graduated from Lake Forest College in 2010, and took a job that paid her $56,000. Jane's younger brother, Joe, graduated from Lake Forest College in 2020, and took a job that paid him $62,000. In order to determine whether Jane or Joe had a larger REAL initial salary, what was Jane's real salary measured in 2020 dollars? A.) $21,638 B.) $52,226 C.) $66,450 D.) $47,193 E.) $144,928C.) $66,450What is the difference between nominal and real values? A.) Nominal values are measured in terms of dollars. Real values are measured in terms of the actual goods produced (e.g., 100 barrels of oil). B.) Nominal values can increase or decrease over time, but real values don't fluctuate. C.) Nominal values are measured in terms of current prices. Real values are adjusted to take inflation into account. D.) Nominal values must increase over time, but real values don't fluctuate. E.) Real values are measured in terms of current prices. Nominal values are adjusted to take inflation into account.C.) Nominal values are measured in terms of current prices. Real values are adjusted to take inflation into account.When calculating real values in class, the math required knowing two different CPI levels and then doing a calculation. However, we also said in class that the real interest rate simply equals the nominal rate minus the inflation rate. Which it the best explanation why real interest rates are so much easier to calculate? A.) Interest rates are already measured as a percentage, and so they are on a comparable scale as inflation (which is also measured as a percentage.) It is also true that real interest rates are not calculated over time. B.) The math in class was wrong, and the calculation of real interest rates is actually very similar to the calculation of real values. C.) Real interest rates can never be negative, and therefore the formula needs use subtraction (and not on multiplication and division as is used for real values) in order to guarantee a positive number. D.) Inflation doesn't affect interest rates. E.) The formulas are really identical, but they look different because of the % sign. But if one changes the % sign to a $ sign, and move the decimal two places, the formulas are the same.A.) Interest rates are already measured as a percentage, and so they are on a comparable scale as inflation (which is also measured as a percentage.) It is also true that real interest rates are not calculated over time.Which of the following will NOT shift aggregate demand out? A.) The government lowering taxes. B.) When the exchange rate moves so that the country's currency is less valuable. C.) Consumer expectations regarding future inflation change so that more inflation is expected in the future. D.) The government increasing its spending. E.) Foreign income decreasing.E.) Foreign income decreasing.The aggregate demand curve slopes downward in part because of the interest rate effect. Which of the following best describes the interest rate effect? A.) When the interest rate increases, the price level also increases. When the price level increases, aggregate demand must fall. B.) Aggregate demand slopes downward because it is the aggregation of all individual demand curves, which must also slope downward. C.) When the price level falls (and assuming the exchange rate doesn't change), domestic goods are less expensive and more attractive to domestic consumers. This leads to an increase in imports. Similarly, when the price level falls, domestically-made goods are less expensive to foreigners. And this leads to an increase in exports. D.) When the price level falls, money can purchase more goods and services, which will increase consumption. E.) When the price level falls, less money is needed to purchase goods and services, so household savings increases. An increase in savings leads to a reduction in the interest rate, and as a result firms borrow more money that they spend on investment.E.) When the price level falls, less money is needed to purchase goods and services, so household savings increases. An increase in savings leads to a reduction in the interest rate, and as a result firms borrow more money that they spend on investment.The aggregate demand curve slopes downward in part because of the wealth effect. Which of the following best describes the wealth effect? A.) When the price level falls, money can purchase more goods and services, which will increase consumption. B.) Aggregate demand slopes downward because it is the aggregation of all individual demand curves, which must also slope downward. C.) When the price level falls (and assuming the exchange rate does not change), domestic goods are less expensive, which leads to a decrease in imports. Likewise, when the price level falls, domestically-made goods are less expensive to foreigners, which leads to an increase in imports. D.) When the interest rate increases, the price level also increases. When the price level increases, aggregate demand must fall. E.) When the price level falls, less money is needed to purchase goods and services, so household savings increases. An increase in savings leads to a reduction in the interest rate, and as a result firms borrow more money that they spend on investment.A.) When the price level falls, money can purchase more goods and services, which will increase consumption.Which of the following statements does NOT apply to the short-run aggregate supply curve (SAS)? A.) The SAS relates the total amount of goods and services supplied in an economy at different price levels holding all else fixed. B.) The use of the SAS is that it's intersection with AD determines the level of short-run output in the economy. C.) The slope of the SAS is positive largely because firms will find it more profitable to produce more output when prices increase. D.) A shift to the right means that more output is supplied to the entire economy at the same price level. E.) All of the above statements apply to the SAS.E.) All of the above statements apply to the SAS.Aggregate demand is written as AD = C + I + G + (X - M). When we graph this function, what is on the Y-axis? A.) The price of the specific good in question. B.) GDP C.) The interest rate. D.) The general overall price level. E.) OutputD.) The general overall price level.Suppose actual output is less than potential output (so that the economy is experiencing a recessionary gap) in the short run. According to Keynes, how might the government help the economy achieve potential output? [We didn't get to this in class today, but the answer is "The government can increase government spending (G) or lower taxes (T) in order to shift out aggregate demand."] A.) According to Keynes, there is nothing the government can do to help this situation other than to not interfere. Rather, the best course of action is to let the economy self-correct as it goes to the long run. B.) The government can increase government spending (G) or lower taxes (T) in order to shift out aggregate supply. C.) The government can increase government spending (G) or lower taxes (T) in order to shift out aggregate demand. D.) The government can decrease government spending (G) or increases taxes (T) in order to shift out aggregate supply. E.) The government can decrease government spending (G) or increases taxes (T) in order to shift out aggregate demand.C.) The government can increase government spending (G) or lower taxes (T) in order to shift out aggregate demand.What is the fundamental premise of the Keynesian Aggregate Supply / Aggregate Demand model? A.) Government can change its spending or tax collection in order to affect overall levels of production in an economy. B.) There is nothing the government can do to help an economy get out of a recession. C.) Workers will work at any wage because they need a job, and therefore wages can be adjusted (downward) by the government to help the economy get out of a recession. D.) Actual output can exceed potential output in the long run. E.) Actual output cannot exceed potential output in the short run.A.) Government can change its spending or tax collection in order to affect overall levels of production in an economy.Which of the following comments about shifts in the SAS is NOT true? A.) The SAS will shift out if the economy experiences a general increase in productivity. B.) The SAS will shift in if the economy experiences a general increase in the price of inputs. C.) The SAS curve will shift out whenever the general price level falls. D.) When the SAS shifts up, it means that less is produced at the same general price level. E.) An increase in supply is associated with the SAS shifting down and out.C.) The SAS curve will shift out whenever the general price level falls.Suppose actual output is less than potential output (so that the economy is experiencing a recessionary gap) in the short run. According to classical theory, what mechanism will cause the economy to self-correct and achieve potential output in the long run? A.) When the economy is experiencing a recessionary gap, production is low and resources (including labor) are idle. At the same time, the general price level has risen. As such, output prices have also risen. Firms will respond to higher output prices by increasing production. B.) With the passing of time, households will want to be able to buy more goods and services, so more people will enter the labor force. C.) When the economy is experiencing a recessionary gap, production is low and resources (including labor) are idle. At the same time, the general price level has fallen. As such, input prices (including the cost of labor) have also fallen. Firms will respond to lower input prices by increasing production. D.) The classical theory does not believe that actual output can ever be less than potential output in the short run, so the theory doesn't directly address how the economy would recover from this unrealistic situation. E.) Whenever actual output is less than potential output, the aggregate demand curve will shift out so that the recessionary gap is eliminated.C.) When the economy is experiencing a recessionary gap, production is low and resources (including labor) are idle. At the same time, the general price level has fallen. As such, input prices (including the cost of labor) have also fallen. Firms will respond to lower input prices by increasing production.Which of the following statements is NOT true regarding the long-run aggregate supply curve (LAS)? A.) The LAS will shift out only if the economy experiences an improvement in productivity, including developing better technologies or having access to more resources. B.) The LAS curve slopes upward because firms will produce more in the long-run if the price at which they can sell their output increases. C.) The SAS curve intersects the LAS curve at potential output. D.) The LAS shows the relationship between the price level and long-run potential output when labor and capital are both fully employed. E.) The LAS is a vertical line at the level of potential output.B.) The LAS curve slopes upward because firms will produce more in the long-run if the price at which they can sell their output increases.In rough terms, what is the distribution of tax revenues for the U.S. federal government? A.) Progressive income taxes = 70%; regressive payroll taxes = 25%; corporate taxes = 5%. B.) Progressive income taxes = 50%; regressive payroll taxes = 40%; corporate taxes = 10%. C.) Regressive income taxes = 70%; progressive payroll taxes = 25%; corporate taxes = 5%. D.) Progressive income taxes = 60%; regressive payroll taxes = 15%; corporate taxes = 25%. E.) Regressive income taxes = 30%; progressive payroll taxes = 50%; corporate taxes = 20%.B.) Progressive income taxes = 50%; regressive payroll taxes = 40%; corporate taxes = 10%.Which of the following would a supporter of fiscal austerity agree with? A.) Government printing money to pay off its debts (i.e., monetizing the debt). B.) Government running structural deficits. C.) Government not regularly spending more money than it receives in tax revenue. D.) Government collecting no tax revenue. E.) Government spending no money.C.) Government not regularly spending more money than it receives in tax revenue.Which of the following statements about the U.S. federal debt is NOT true? A.) On a per-capita basis, the ratio of U.S. federal debt to GDP was at an all-time high in 2020 standing at almost 130%. B.) The debt equals government spending less taxes collected over the last year. C.) About 30% of U.S. government debt is held by foreign individuals and firms. D.) The U.S. federal debt is about $29 trillion dollars, or almost $100,000 per person living in the United States. E.) The debt is the sum of all budget deficits and budget surpluses over time.B.) The debt equals government spending less taxes collected over the last year.Which of the following statements about structural and cyclical deficits is true? A.) Cyclical deficits add to the debt, whereas structural deficits do not. B.) A structural deficit is a deficit that will disappear with time even if no action is taken, because there is an underlying force that will correct the deficit. In contrast, a cyclical deficit is a deficit that will be replicated into the future if no action is taken, because there is no underlying force to correct the deficit. C.) A structural deficit is a deficit that will be replicated into the future if no action is taken, because there is no underlying force to correct the deficit. In contrast, a cyclical deficit is a deficit that will disappear with time even if no action is taken, because there is an underlying force that will correct the deficit. D.) There is no fundamental difference between structural and cyclical deficits. The only difference between the two is a result of applying different accounting standards to the same phenomenon. E.) Structural deficits add to the debt, whereas cyclical deficits do not.C.) A structural deficit is a deficit that will be replicated into the future if no action is taken, because there is no underlying force to correct the deficit. In contrast, a cyclical deficit is a deficit that will disappear with time even if no action is taken, because there is an underlying force that will correct the deficit.Which of the following is the best definition of a government budget deficit? A.) The budget deficit equals the amount of spending in a year that exceeds the amount of tax collection in that year. B.) The budget deficit is the the dollar value of the difference between potential output and actual output over an entire year. C.) The budget deficit is the amount of money a government spends in a year. D.) The budget deficit represents the amount of additional tax revenue the government would receive if no one cheated on their taxes. E.) The budget deficit is the amount of money the government owes to bond holders.A.) The budget deficit equals the amount of spending in a year that exceeds the amount of tax collection in that year.Which of the following reasons explains in part why debt and deficit situation in the United States is dangerous for the economy? A.) A debt-to-GDP ratio above 100% will likely require interest rates to increase, which will further exacerbate the burden of the debt. B.) With about 45% of all spending in the United States tied to government at some level, the sheer number of people dependent on government spending will limit political power and ability to address government over-spending. C.) Politicians are very bad at intentionally running budget surpluses during good times as Keynes argued was important. D.) The sheer size of the deficit and debt can prevent further government stimuli from being effective as confidence erodes and leakages (e.g., foreign ownership of debt) benefit from some of the stimulus. E.) All of the above are reasons to be concerned about the size of the debt and deficit in the United States.E.) All of the above are reasons to be concerned about the size of the debt and deficit in the United States.What is an automatic stabilizer? A.) An automatic stabilizer is a government policy that naturally increases government spending or lowers tax collections whenever actual output is below potential output, and naturally decreases government spending or raises tax collections whenever actual output is above potential output, B.) An automatic stabilizer is a government policy that transfers money from wealthy households and firms to less-wealthy households. C.) An automatic stabilizer is a government policy that spends tax money that has already been collected, and therefore it is impossible for the government to run a deficit because of the automatic stabilizer. D.) An automatic stabilizer is a government policy that naturally decreases government spending or raises tax collections whenever actual output is below potential output, and naturally increases government spending or lowers tax collections whenever actual output is above potential output, E.) An automatic stabilizer is a government policy that taxes firms and foreigners and provides benefits to citizens.A.) An automatic stabilizer is a government policy that naturally increases government spending or lowers tax collections whenever actual output is below potential output, and naturally decreases government spending or raises tax collections whenever actual output is above potential output,What is the main idea behind the Ricardian Equivalence Theorem? A.) The multiplier effect is difficult to measure, so the government rarely knows how much expansionary fiscal action to take. B.) Tax payers will avoid paying taxes if the tax burden increases too much. C.) Politicians are very bad at conducting contractionary fiscal policy. D.) Expansionary fiscal policy funded with increased debt will fail to have much impact on the economy as households will reduce spending as they prepare to have to pay off the new government debt in the future. E.) Governments are bad at eliminating expansionary spending after the economy has recovered.D.) Expansionary fiscal policy funded with increased debt will fail to have much impact on the economy as households will reduce spending as they prepare to have to pay off the new government debt in the future.Which of the following is NOT considered to be an automatic stabilizer? A.) Unemployment benefits. B.) A progressive income tax. C.) Almost any means-tested program. D.) Temporary aid for needy families (TANF). E.) Social security payments to the elderly that do not increase or decrease with the state of the macro-economy.E.) Social security payments to the elderly that do not increase or decrease with the state of the macro-economy.What does it mean for a government program to be means-tested? A.) The program is intended for everyone, not just people who pay taxes. B.) The government only runs the program for a fixed period of time. C.) Benefits from the program are given only to poor households (i.e., households whose income falls below a certain threshold). D.) Households automatically qualify for benefits without even applying for them (e.g., the child tax credit). E.) The program only provides benefits to people who previously paid into the program (e.g., social security).C.) Benefits from the program are given only to poor households (i.e., households whose income falls below a certain threshold).