Quiz · Hard
Calculate GDP, real GDP, inflation, unemployment and multipliers, then apply fiscal policy, monetary policy, AD-AS and the Phillips curve. For AP Macro and intro macro exams.
An economy has consumption of $500B, investment $150B, government purchases $200B, exports $80B and imports $100B. What is GDP?
$1,030B
$830B
$850B
$930B
. Imports are subtracted because they were produced abroad.
Which of these is counted in this year's GDP?
Buying a 2015 used car from a neighbor
Buying shares of Apple stock
A Social Security check sent to a retiree
A new house built and sold this year
GDP counts newly produced final goods and services. Used goods were counted when made, stocks are financial transfers, and Social Security is a transfer payment, not a purchase of output.
Nominal GDP is $1,100 billion and the GDP deflator is 110. What is real GDP?
$1,000 billion
$1,210 billion
$990 billion
$1,100 billion
.
The CPI rises from 200 to 210 over a year. What is the inflation rate?
10%
4.8%
5%
2.1%
. Divide by the starting value, not the ending value (which gives about 4.8%).
A bank loan charges 7% nominal interest, and inflation is 3%. The real interest rate is about:
10%
4%
2.3%
-4%
Real rate ≈ nominal rate - inflation = 7% - 3% = 4% (the Fisher equation). This is what the lender actually gains in purchasing power.
A country has 190 million employed people, 10 million unemployed people and 50 million adults not in the labor force. What is the unemployment rate?
4%
5.3%
20%
5%
Unemployment rate = unemployed / labor force = 10 / (190 + 10) = 5%. People not in the labor force are left out of the calculation entirely.
Many unemployed workers become discouraged and stop looking for jobs. What happens to the measured unemployment rate?
It falls, even though no one found a job
It rises
It is unchanged
It becomes negative
Discouraged workers drop out of the labor force, so both the number unemployed and the labor force shrink, which lowers the rate. This is why the unemployment rate can understate weakness in the job market.
An autoworker is laid off because car sales fell during a recession. This is:
Frictional unemployment
Structural unemployment
Cyclical unemployment
Seasonal unemployment
Cyclical unemployment comes from a downturn in the business cycle. Frictional = between jobs or searching; structural = skills mismatch or jobs replaced by technology.
The marginal propensity to consume (MPC) is 0.8. Government spending rises by $10 billion. What is the maximum change in real GDP?
$8 billion
$12.5 billion
$40 billion
$50 billion
, so 5 × $10B = $50B. $40B is the result for a tax cut of the same size.
With an MPC of 0.8, the government cuts taxes by $10 billion. What is the maximum change in real GDP?
+$50 billion
+$40 billion
+$10 billion
+$8 billion
(negative for tax increases). Tax changes have a smaller effect than spending because part of the tax cut is saved.
The economy is in a recession. Which action by the Federal Reserve is expansionary?
Selling government bonds on the open market
Raising the discount rate
Buying government bonds on the open market
Raising the interest rate paid on bank reserves
Buying bonds puts money into banks' reserves, lowering interest rates and encouraging borrowing and spending. The other three are contractionary.
The reserve requirement is 10%. Someone deposits $1,000 of new cash in a bank. What is the maximum amount of NEW money the banking system can create through loans?
$9,000
$10,000
$900
$1,000
The bank keeps $100 and can lend $900 of excess reserves. Money multiplier = 1 / 0.10 = 10, so 10 × $900 = $9,000 in new money. The $1,000 deposit itself just changed form from cash to a checking deposit.
A sudden spike in oil prices raises production costs across the economy. In the AD-AS model, the short-run result is:
Higher output and lower prices
Lower output and higher prices (stagflation)
Higher output and higher prices
Lower output and lower prices
A supply shock shifts short-run aggregate supply (SRAS) left, raising the price level while reducing real GDP, as in the 1970s.
The government runs a large deficit and borrows heavily, pushing up interest rates and reducing private investment. This is called:
Crowding out
The wealth effect
Fiscal drag
The liquidity trap
Government borrowing increases demand for loanable funds, raising real interest rates and 'crowding out' private investment, which weakens fiscal policy's effect.
What does the long-run Phillips curve look like, and why?
Downward sloping, because there is a permanent tradeoff between inflation and unemployment
Horizontal, because inflation never changes in the long run
Upward sloping, because inflation causes unemployment
Vertical at the natural rate of unemployment, because expectations adjust to inflation
In the short run there is a tradeoff, but once people expect higher inflation, unemployment returns to its natural rate at any inflation level.
According to the quantity theory of money (), if velocity and real output are constant and the money supply grows 10%, then:
Real GDP grows 10%
The price level rises about 10%
Velocity falls 10%
Interest rates fall 10%
With V and Y fixed, any increase in M must show up in P. This is the monetarist explanation of long-run inflation.
US interest rates rise relative to Europe's. What happens to the US dollar, and to US exports?
The dollar depreciates; exports rise
The dollar depreciates; exports fall
The dollar appreciates; exports fall
The dollar appreciates; exports rise
Higher returns attract foreign investors, who buy dollars, so the dollar appreciates. A stronger dollar makes US goods more expensive abroad, so net exports fall.
