Chapter 01: Introduction to Macroeconomics

Multiple Choice

1. Macroeconomics does not try to answer the question of:

  a. why some countries experience rapid growth.
  b. what is the rate of return on education.
  c. why some countries have high rates of inflation.
  d. what causes recessions and depressions.

2. A typical trend during a recession is that:

  a. the unemployment rate falls.
  b. the popularity of the prime minister rises.
  c. incomes fall.
  d. the inflation rate rises.

3. Macroeconomics is the study of the:

  a. activities of individual units of the economy.
  b. decision-making by households and firms.
  c. economy as a whole.
  d. interaction of firms and households in the marketplace.

4. The study of the economy as a whole is called:

  a. household economics.
  b. business economics.
  c. microeconomics.
  d. macroeconomics.

5. All of the following are types of macroeconomics data except the:

  a. price of a computer.
  b. growth rate of real GDP.
  c. inflation rate.
  d. unemployment rate.

6. All of the following except _____ are important macroeconomic variables.

  a. real GDP
  b. the unemployment rate
  c. the marginal rate of substitution
  d. the inflation rate
7. The total income of everyone in the economy adjusted for the level of base year prices is called:
  a. a recession.
  b. an inflation.
  c. real GDP.
  d. a business fluctuation.

8. The inflation rate is a measure of how fast:

  a. the total income of the economy is growing.
  b. unemployment in the economy is increasing.
  c. the general level of prices in the economy is rising.
  d. the number of jobs in the economy is expanding.

9. Compared with the real GDP during a recession, real GDP during a depression:
  a. increases more rapidly.
  b. increases at approximately the same rate.
  c. decreases at approximately the same rate.
  d. decreases more severely.

10. Deflation occurs when:

  a. the real GDP decreases.
  b. the unemployment rate decreases.
  c. prices fall.
  d. prices increase but at a slower rate.

11. Exogenous variables are:

  a. determined outside the model.
  b. determined within the model.
  c. the outputs of the model.
  d. explained by the model.

12. Endogenous variables are:

  a. fixed at the moment they enter the model.
  b. determined within the model (/model output).
  c. the inputs of the model.
  d. from outside the model.

13. Macroeconomic models are used to explain how _____ variables influence _____ variables.
  a. endogenous; exogenous
  b. exogenous; endogenous
  c. microeconomic; macroeconomic
  d. macroeconomic; microeconomic
14. Which of the following statements about economic models is true?
  a. There is only one correct economic model.
  b. All economic models are based on the same assumptions.
  c. The purpose of economic models is to show how endogenous variables affect exogenous
variables.
  d. Economists use different models to address different economic phenomena.

15. The assumption of flexible prices is a more plausible assumption when applied to price changes
that occur:
  a. from minute to minute.
  b. from year to year.
  c. in the long run.
  d. in the short run.

Chapter 02: The data of Macroeconomics

Statements

1. GDP is not a measure of the economic output, but of economic well-being.

Answer

GDP is a measure of domestic production, as it gives the total value of goods and services produced
in the economy in a given period, while as an indicator of well-being is considered GDP per capita
or NEW.
The statement is false.

2. Gross domestic product (GDP) is the market value of all final goods and services produced within
an economy during several years.

The statement is false. Gross domestic product (GDP) is the market value of all final goods and
services produced within an economy in a given period of time (within a year).

3. Taking into consideration the rules of computing GDP, during GDP calculation both intermediate
goods and final goods are included.

Answer
GDP computing methods:

1. expenditures
2. income
3. value added.
4. last transaction.

According to the last transaction method, GDP includes only final goods and not intermediate
goods. The reason is that the value of intermediate goods is already included as part of the
market price of the final goods in which they are used. To add the intermediate goods to the final
goods would be double counting.
The statement is false.

4. GDP growth and unemployment growth are positively correlated.

(It is possible to refer to the Okun’s law or to the macroeconomic theory).

5. If real GDP tends to increase and the price index also tends to increase, the nominal GDP will
decline.
Answer

Notice that nominal GDP can increase either because prices rise or because quantities rise.
Nominal GDP is the sum of P * Q for each year for each product in the economy = ƩPit*Qit

Meanwhile the Real GDP is the sum of Q of each year multiplied with P (constatnt set of
prices/base year). = Ʃpbase *Qit

If real GDP rises, we can affirm that the quantity Qit will rise because the prices are fixed.

Nominal GDP = ƩPit *Qit

For the nominal GDP to decline, the prices Pit will have to decline by a higher percentage than
the percentage of Qit increase.

So, it is not possible to say that if the real GDP increases, nominal GDP will always decline. The
statement is wrong.

Multiple choice exercises

1. If production remains the same and all prices double, then real GDP:

A. and nominal GDP are both constant.

B. is constant and nominal GDP is reduced by half.
C. is constant and nominal GDP doubles.
D. doubles and nominal GDP is constant.

Statement
If production remains the same and all prices double, then real GDP is constant and nominal GDP
doubles.
Real GDP = sum (Pb *Qc) if the prices of the current year double, then real GDP will not be
affected by this change. If we suppose that Qc does not change, then real GDP will be constant
(compared to the previous year). If Qc changes then real GDP will change in the same direction.
Nominal GDP = sum (Pc*Qc). If we suppose that there are no changes to Qc (compared to the
previous one) then, nominal GDP will double. But if Qc rises than nominal GDP will increase more.
If Qc falls, then it is necessary to see which effect is bigger, the fall in Qc or the increase in Pc.
2. The consumer price index (CPI):

A. measures the price of a fixed basket of goods and services relative to the price of that same basket
in some base year.
B. measures the price of a basket of goods and services that constantly changes as the composition of
consumer spending changes.
C. measures the amount of money that it takes to produce a fixed level of utility.
D. is one of the many statistics in the National Income Accounts.

GDP deflator uses Qit (quantities in the current period/year).

GDP deflator = (ƩPit*Qit/ ƩPbase*Qit)*100

CPI = (ƩPit*Qbase/ ƩPbase*Qbase)*100

CPI use the quantities in the base year

3. Suppose that the size of the labor force is 100 million and that the unemployment rate is 5 per
cent. Which of the following actions would reduce the unemployment rate the most?

A. 1 million unemployed people get jobs.

B. 2 million unemployed people leave the labor force.
C. 3 million people join the labor force, and they all get jobs.
D. 10 million people join the labor force and half of them get jobs.

Statement
Suppose that the size of the labor force is 100 million and that the unemployment rate is 5 per cent. If
1 million unemployed people get jobs than unemployment rate will be 3%.
Answer
Labor Force (LF) = Number of Employed (E) + Number of Unemployed (U)

Unemployment Rate = Number of Unemployed / Labor Force * 100

At the beginning unemployed people = 5% *100 = 5 million

The new unemployed = 5 million – 1 million = 4 million
Unemployment rate = 4/100 = 0.04 or 4%.

4. Suppose that a German citizen crosses the border each day to work in Switzerland. Her income
from this job would be counted in:

a. Swiss GNP and German GNP.

b. Swiss GNP and German GDP.
c. Swiss GDP and German GNP.
d. Swiss GDP and German GDP.

If a German citizen crosses the border each day to work in Switzerland, her income from this job
would be counted in Swiss GDP and German GNP.
Swiss GDP includes every good and service produced within the borders of Switzerland from Swiss
people or others. So, the income of German citizen is included in Swiss GDP because the goods and
services that she is producing are produced within the borders of Switzerland.
German GNP includes all goods and services produced from Germans regardless of the country they
work. So, the income of German citizen is included in German GNP.

So, the statement is true.

Exercises

5. Amortization is part of the disposable income.

Answer

Disposable income (Yd) = Y+TR-T, meanwhile Y= GDP = C+ Gross Investments + G+ NX

Gross Investments = Net investments + Amortization
Yd = Y-T
The statement is true because the amortization is part of the disposable income, as it is part of the
income, in the gross investments.

6. Suppose that net investments are 5% of GDP. During this year they have fallen to 0. Then we say
that gross investments are zero.

Answer

Net Investments /GDP=5% but currently Net Investments/GDP=0% which means that Net
Investments = 0

We know that Gross investments = Net investments + Amortization, thus Gross investments =
Amortization.

The statement is false because gross investments are not zero, they equal the amortization.

8. Suppose the labor force is 100 million, and 50% of them are working, then the number of
unemployed people is 50 million.

Answer

The labor force is the sum of the employed and unemployed, and the unemployment rate is the
percentage of the labor force that is unemployed.

That is, Labor Force (LF) = Number of Employed (E) + Number of Unemployed (U)
Unemployment Rate = Number of Unemployed / Labor Force * 100

50% of 100 million = 50 million employed.

Unemployed = 100 million (LF) – 50 million (E) = 50 million unemployed.

The statement is true.

9. Suppose an economy has a working force of 80 million people and 90% of them are employed.
Then the unemployed people would be 1 million and the unemployment rate would be 5%.

LF =80 million and employed = 90%*80 million = 72 million employed

1. Unemployed =LF- employed = 80 million – 72 million = 8 million

2. Unemployment rate = Unemployed /FP* 100 = 8 million /80 million *100 =10%

The statement is false, because the number of unemployed people is 8 million and the
Unemployment rate is 10%

10. If a country's population growth rate is zero, then real GDP per capita will grow at a slower rate
than real GDP.

Answer

Real GDP per capita = Real GDP /no. of population

Real GDP ( t ) – Real GDP ( t−1 )

Real GDP growthrate= ∗100
Real GDP(t−1)

Real GDP ( t ) Real GDP ( t−1 )

−
no . of population ( t ) no . of population(t−1)
Real GDP per capita growth rate= ∗100
Real GDP(t−1)
no . of population(t−1)

Since the population growth rate is zero, it means that no. of population (t) = no. of population (t-
1)

Real GDP ( t ) Real GDP ( t−1 )

−
no . of population ( t ) no . of population ( t )
Real GDP per capita growth rate= ∗100
Real GDP(t−1)
no . of population ( t )

Real GDP ( t ) – Real GDP ( t−1 )

Real GDP per capita growth rate= ∗100
Real GDP ( t−1 )

The statement is false, because the pace of growth is the same.

11. Explain the difference between macroeconomics and microeconomics. How are these two fields
related?

12. Place each of the following transactions in one of the four components of expenditure:
consumption, investment, government purchases, and net exports.
a. Boeing sells an airplane to the U.S. Air Force.
b. Boeing sells an airplane to American Airlines.
c. Boeing sells an airplane to Air France.
d. Boeing sells an airplane to Amelia Earhart.
e. Boeing builds an airplane to be sold next year.

13. Consider whether each of the following events is likely to increase or decrease real GDP. In each
case, do you think the well-being of the average person in society most likely changes in the same
direction as real GDP? Why or why not?

a. A hurricane in Florida forces Disney World to shut down for a month.

b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests.
c. Increased hostility between unions and management sparks a rash of strikes.
d. Firms throughout the economy experience falling demand, causing them to lay off workers.
e. Congress passes new environmental laws that prohibit firms from using production methods that
emit large quantities of pollution.
f. More high school students drop out of school to take jobs mowing lawns.
g. Fathers around the country reduce their workweeks to spend more time with their children.

If the economy experiences a falling demand, causing them to lay off workers, real GDP will
decline and the well-being of the average person in society will deteriorate.