Economics 252 (Revised)

Review Questions Chapter 8 – Introduction to Economic Growth and Instability

(1) Economic growth is best defined as an increase in:

(a) either real GDP or real GDP per capita.

(b) nominal GDP.

(d) wealth in the economy.

(2) Read GDP per capital is found by:

(a) adding real GDP and population.

(b) subtracting population from real GDP,

(d) dividing population by real GDP.

(3) Real GDP per capita:

(a) cannot grow more rapidly than real GDP.

(b) cannot grow more slowly than real GDP.

(d) can grow either more slowly or more rapidly that real GDP.

(4) Which of the following measures improvements in the standard of living of a nation?

(a) growth of nominal GDP.

(b) growth of real GDP.

(d) growth of national income.

(5) If a nation’s real GDP increases from $100 billion to $106 billion, and its population jumps form 200 million to 212 million, it’s real GDP per capita will:

(a) remain constant.

(b) fall by 6 percent.

(d) fall by 12 percent

(6) The industries of sectors of the economy in which output is likely to be most strongly affected by the business cycle are:

(a) military goods.

(b) non-durable goods such as toothpaste.

(d) durable goods such as automobiles.

(7) The phase of the business cycle in which real GDP declines is called:

(a) a peak.

(b) a recession.

(d) the trough.

Use the information from Table 1 to answer Questions (8) and (9).

Table 1

Alta Zorn Alta Zorn

Year (real GDP) (real GDP) (population) (population)

1 $2,000 $150,000 200 500

2 $2,100 $152,000 202 505

3 $2.500 $154,000 210 508

(8) In Table 1, between years 1 and 2, real GDP per capita grew by ___ percent in Alta.

(a) 2.00

(b) 3.96

(d) 40.00

(9) In Table 1, between years 2 and 3:

(a) Alta’s real GDP grew more rapidly than Zorn’s real GDP.

(b) real GDP fell in Zorn.

(d) population growth turned to decline in Alta.

Use the information from Table 2 to answer Questions (10), (11), and (12).

Table 2

All figures are millions.

Not in the labor force 45

Unemployed 7

Total population 145

Employed 95

Discouraged workers 3

(10) In Table 2, the labor force is:

(a) 95 million.

(b) 102 million.

(d) 145 million.

(11) In Table 2, the unemployment rate is:

(a) 2.5 percent.

(b) 3.2 percent.

(d) 6.9 percent.

(12) In Table 2, if the natural rate of unemployment is 5 percent, then:

(a) structural unemployment is 3.1 percent.

(b) frictional unemployment is 1.9 percent.

(d) hidden unemployment is 5.1 percent.

(13) Kimberly voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kimberly presently is:

(a) cyclically unemployed.

(b) structurally unemployed.

(d) not a member of the labor force.

(14) Suppose Kimberly in Question (13) is still in school and has not yet earned her MBA degree. Kimberly is not currently looking for work and is not working part-time. Kimberly is:

(a) cyclically unemployed.

(b) structurally unemployed.

(d) not a member of the labor force.

(15) Anne Kasperson works in her own home as a full-time homemaker. Officially, she is:

(a) unemployed.

(b) employed.

(d) in the labor force.

(16) Ms. Eckstein has lost her job in a Massachusetts textile plant because of import competition brought about by permanent tariff reductions. She intends to take a short course in electronics and move to California where she anticipates that a new job will be available. We may say that Ms. Eckstein is faced with:

(a) secular unemployment.

(b) cyclical unemployment.

(d) frictional unemployment.

(17) If actual GDP is $500 billion and there is a negative GDP gap pf $10 billion, potential GDP is:

(a) $510 billion.

(b) $490 billion.

(d) $990 billion.

(18) Assume the natural rate of unemployment in the US economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun’s law, the negative GDP gap as a percent of potential GDP is:

(a) 4 percent.

(b) 8 percent.

(d) 2 percent.

(19) The consumer price indeed was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:

(a) 6.7 percent.

(b) 3.4 percent.

(d) 4.1 percent.

(20) Demand-pull inflation:

(a) occurs when prices of resources rise, pushing up costs and the price level.

(b) occurs when total spending exceeds the economy’s ability to provide output and the existing price level.

(d) is also called cost-push inflation.

(21) Inflation initiated by increases in wages or other resource prices is labeled:

(a) demand-pull inflation.

(b) demand-push inflation.

(d) cost-pull inflation.

(22) Suppose that a person’s nominal income rises by 5 percent and the price level rises from 125 to 130. The person’s real income will:

(a) fall by about 1 percent.

(b) remain constant.

(d) rise by about 1 percent.

(23) Who is least likely to be hurt by unanticipated inflation?

(a) a disabled laborer who is living off accumulated savings and does not qualify for social security.

(b) a union worker with a COLA clause in his contract.

(d) a retired person living off an IRA, who does not qualify for social security.

(24) Who is most likely to be hurt by unanticipated inflation?

(a) a union worker with a COLA clause in his contract.

(b) a millionaire with a wide variety of equity, real estate, and interest bearing securities in his retirement portfolio.

(d) a secretary working for a small and struggling non-profit agency.

(25) If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:

(a) 8 percent. (b) 5 percent (c) 3 percent (d) 2 percent