Real GDP measures the total market value of all final goods and services produced within a country's borders in a given period, adjusted for inflation.
Correct Answer
True
Real GDP accounts for price level changes, providing a more accurate measure of the actual volume of output.
Question 2
The sale of a used car contributes to a nation's GDP in the year it is resold, as it represents a market transaction.
Correct Answer
False
GDP only includes the value of newly produced goods and services. The sale of a used car is a transfer of existing wealth and does not represent new production.
Question 3
Services provided by a homeowner to maintain their own house, such as cleaning or repairs, are included in GDP calculations because they represent productive activity.
Correct Answer
False
GDP only includes market transactions. Household production for personal consumption, while productive, is not exchanged in markets and is therefore excluded from standard GDP calculations.
Question 4
An increase in nominal GDP always indicates that a country's production of goods and services has increased.
Correct Answer
False
An increase in nominal GDP can be due to an increase in production, an increase in prices, or both. If prices rise significantly, nominal GDP can increase even if real production has decreased or remained constant.
Question 5
Demand-pull inflation occurs when an increase in the costs of production, such as wages or raw materials, leads to higher prices.
Correct Answer
False
Demand-pull inflation is caused by excessive aggregate demand relative to the economy's productive capacity. Inflation caused by increased production costs is known as cost-push inflation.
Question 6
A sustained decrease in the general price level is known as disinflation.
Correct Answer
False
A sustained decrease in the general price level is called deflation. Disinflation refers to a slowdown in the rate of inflation (prices are still rising, but at a slower pace).
Question 7
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Correct Answer
True
This is the standard definition of the CPI, which is a key measure of inflation.
Question 8
Unexpected inflation can redistribute wealth from borrowers to lenders because the real value of future loan repayments decreases.
Correct Answer
False
Unexpected inflation redistributes wealth from lenders to borrowers. Borrowers repay loans with money that has less purchasing power than the money they originally borrowed, benefiting them at the expense of lenders.
Question 9
Frictional unemployment is a natural part of a healthy economy and occurs when people are temporarily between jobs or are searching for their first job.
Correct Answer
True
Frictional unemployment is short-term and results from the time it takes for workers to search for and find new jobs, which is an inevitable part of a dynamic labor market.
Question 10
Cyclical unemployment refers to the unemployment that arises from a mismatch between the skills workers have and the skills demanded by employers.
Correct Answer
False
This describes structural unemployment. Cyclical unemployment is caused by downturns in the business cycle, resulting from insufficient aggregate demand.
Question 11
The natural rate of unemployment includes both frictional and structural unemployment.
Correct Answer
True
The natural rate of unemployment is the unemployment rate that would exist in a healthy economy when it is producing at its potential output, and it consists of frictional and structural unemployment, but not cyclical unemployment.
Question 12
An individual who has been laid off and has stopped looking for work because they believe no jobs are available is considered unemployed.
Correct Answer
False
To be counted as unemployed, an individual must be without a job, be available for work, and have actively looked for work within the past four weeks. Someone who has stopped looking is considered a discouraged worker and is not part of the labor force, thus not unemployed.
Question 13
Expansionary fiscal policy involves increasing government spending or decreasing taxes to shift the aggregate demand curve to the right.
Correct Answer
True
Expansionary fiscal policy aims to stimulate the economy by boosting aggregate demand, which means shifting the AD curve to the right.
Question 14
An increase in government spending financed by borrowing can lead to crowding out, where private investment decreases due to higher interest rates.
Correct Answer
True
Crowding out occurs when government borrowing to finance deficits increases the demand for loanable funds, driving up interest rates and making it more expensive for private firms to invest.
Question 15
Fiscal policy is conducted by the central bank to influence the money supply and credit conditions.
Correct Answer
False
Fiscal policy is conducted by the legislative and executive branches of government (e.g., Congress and the President) through government spending and taxation. Monetary policy is conducted by the central bank.
Question 16
The Federal Reserve can increase the money supply by selling government bonds in the open market.
Correct Answer
False
The Federal Reserve buys government bonds in the open market to increase the money supply (injecting money into the banking system). Selling bonds removes money from circulation, decreasing the money supply.
Question 17
Decreasing the discount rate encourages banks to borrow more from the central bank, which typically leads to an increase in the money supply.
Correct Answer
True
A lower discount rate makes it cheaper for banks to borrow reserves, encouraging them to lend more and thereby increasing the money supply.
Question 18
Contractionary monetary policy is used to combat inflation by increasing interest rates and reducing the money supply.
Correct Answer
True
Contractionary monetary policy aims to cool down an overheated economy and reduce inflationary pressures by making borrowing more expensive, which curbs aggregate demand.
Question 19
An increase in household wealth, perhaps due to a booming stock market, will typically cause the aggregate demand curve to shift to the right.
Correct Answer
True
Increased household wealth leads to higher consumer confidence and spending, which is a component of aggregate demand, thus shifting the aggregate demand curve to the right.
Question 20
The short-run aggregate supply curve is upward-sloping because, in the short run, nominal wages and other input prices are sticky and do not immediately adjust to changes in the price level.
Correct Answer
True
The stickiness of input prices (like wages) in the short run means that firms can increase production profitably when output prices rise, leading to an upward-sloping SRAS curve.
Question 21
Long-run aggregate supply (LRAS) is vertical at the natural rate of unemployment because, in the long run, all prices and wages are flexible, and the economy produces at its potential output regardless of the price level.
Correct Answer
True
In the long run, the economy's productive capacity (potential GDP) is determined by its resources and technology, not the price level. Therefore, the LRAS curve is vertical at potential output.
Question 22
Economic growth is represented by an inward shift of the Production Possibilities Frontier (PPF).
Correct Answer
False
Economic growth signifies an increase in an economy's productive capacity, which is represented by an outward shift of the Production Possibilities Frontier (PPF). An inward shift would represent economic contraction or a decrease in potential output.