Question 1

Given the following data, calculate the growth rate in real GDP from 1995 to 1996.

Year: 1995, Nominal GDP: $$4,663$$ billion, Price Index: $$119$$
Year: 1996, Nominal GDP: $$4,998$$ billion, Price Index: $$124$$

Use the formula $$	ext{Real GDP} = \frac{	ext{Nominal GDP}}{	ext{Price Index}} 	imes 100$$ and $$	ext{Growth Rate} = \frac{	ext{Real GDP}_{1996} - 	ext{Real GDP}_{1995}}{	ext{Real GDP}_{1995}} 	imes 100.$$

Accepted Answer

2.9 percent

Question 2

Using the same data, calculate the inflation rate between 1995 and 1996 using the GDP deflator.

Use the formula $$	ext{Inflation Rate} = \frac{	ext{Price Index}_{1996} - 	ext{Price Index}_{1995}}{	ext{Price Index}_{1995}} 	imes 100.$$

Accepted Answer

2.5 percent

Question 3

If a bank offers a nominal interest rate of $$7\%$$ and you expect inflation to be $$2\%$$, what is the expected real rate of interest? Use the Fisher equation: $$r = i - \pi^e.$$

Accepted Answer

5\%

Question 4

Unemployment caused by a mismatch between workers' skills and job requirements is known as:

Accepted Answer

Structural unemployment

Question 5

If inflation is lower than expected, who is penalized and why?

Accepted Answer

Borrowers are penalized because the ex post real interest rate is higher than they expected.

Question 6

Why is the demand curve for loanable funds downward sloping?

Accepted Answer

As interest rates decrease, firms find it cheaper to borrow funds for investment projects.

Question 7

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

Accepted Answer

An increase in technology.

Question 8

Refer to the first image (per-worker production function). Which movement best represents a positive technological change?

Accepted Answer

B to D

Question 9

In the long-run economic growth model, the theory of convergence predicts that:

Accepted Answer

GDP per capita of poor countries will grow more rapidly than in rich countries.

Question 10

Suppose the economy is initially at full employment, but then firms become more pessimistic about the future profitability of new investment. In the short run, which of the following will happen?

Accepted Answer

The aggregate demand curve will shift to the left.

Question 11

If actual GDP exceeds potential GDP, why does the short-run aggregate supply curve shift to the left in the long run?

Accepted Answer

Workers and firms adjust their expectations of wages and prices upward and they bargain for higher wages and prices.

Question 12

In the AS-AD model, an improvement in technology causes:

Accepted Answer

The long-run aggregate supply curve will shift to the right.

Question 13

If the Fed lowers the interest rate paid on reserves, what is the likely effect?

Accepted Answer

This encourages more bank lending and causes other interest rates to fall.

Question 14

Which of the following is an example of discretionary fiscal policy?

Accepted Answer

Tax cuts passed by Congress to combat a recession.

Question 15

Crowding out occurs when an increase in government spending:

Accepted Answer

Increases the interest rate and private investment spending declines.

Question 16

If the federal government's expenditures are less than its tax revenues, then:

Accepted Answer

A budget surplus results.

Question 17

In the dollar-euro market, if the exchange rate goes from $$1.30$$ USD/Euro to $$1.50$$ USD/Euro, then it is likely that:

Accepted Answer

U.S. exports to Europe will decrease, while U.S. imports from Europe will increase.

Question 18

Which of the following statements about international financial flows is accurate?

Accepted Answer

Countries with National Saving $$\u003e$$ Investment are net lenders abroad.

Question 19

Which of the following transactions would be included in Germany's financial account?

Accepted Answer

A German citizen purchases 100 shares of Google stock (Google = US company).

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