Chapter 01

Question 1

Macroeconomics

Answer 1

Study of the forces that influence the economy as a whole.

Question 2

Real GDP (Gross Domestic Product)

Answer 2

It measures the total income of everyone in the economy (adjusted for the level of prices).

Question 3

Inflation rate

Answer 3

It measures how fast prices are rising.

Question 4

Unemployment rate

Answer 4

It measures the fraction of the labor force that is out of work.

Question 5

Recession

Answer 5

A sustained period of falling income.

Question 6

Depression

Answer 6

A very severe recession (sustained period of falling income).

Question 7

Deflation

Answer 7

Periods of falling prices.

Question 8

Model

Answer 8

A simplified representation of reality, often using diagrams or equations, that shows how variables interact.

Question 9

Exogenous variables

Answer 9

The variables that are given for a model. Variables that are independent of the model’s solution.

Question 10

Endogenous variables

Answer 10

Variables that a model tries to explain. Dependent variables.

Question 11

Market clearing

Answer 11

A model that assumes that prices freely adjust to equilibrate supply and demand.

Question 12

Flexible prices

Answer 12

Prices that adjust quickly to equilibrate supply and demand.

Question 13

Sticky prices

Answer 13

Prices that adjust sluggishly and therefore, do not always equilibrate supply and demand.

Question 14

Microeconomics

Answer 14

The study of how households and firms make decisions and how these decisionmakers interact in the marketplace.

Question 15

________________ is the study of the economy as a whole. It focuses on on issues such as economic growth, inflation, and unemployment.
________________ is the study of the economy in the small. It focuses on the individual firm, industry, or consumer.

Answer 15

Macroeconomics

Microeconomics

Question 16

__________________ measures the total income of everyone in the economy.. A period in which this measure is falling is called a(n) __________________ if the decline is small, and a ___________________ if the decline is severe.

Answer 16

Real GDP
recession
depression

Question 17

During depressions, many people lose their jobs, so _____________________ rises substantially.

Answer 17

unemployment

Question 18

An increase in the general level of prices is called ________________.

Answer 18

inflation

Question 19

Economists construct _______________ to assist them in understanding the real world.

Answer 19

models

Question 20

One purpose of an economic model is to show how the __________________ variables affect the _________________ variables, where the former come from outside the model and the latter are determined within the model.

Answer 20

exogenous

endogenous

Question 21

With regard to prices, most macroeconomists believe that _______________________ is a rerasonable assumption for studying long-run issues but that ____________________ is a better assumption for studying short-run issues.

Answer 21

price flexibility

price stickiness

Question 22

Models that exhibit price flexibility are examples of __________________ models.

Answer 22

market-clearing

Question 23

If real GDP is growing rapidly, which of the following is most likely to occur?

a. a recession
b. a depression
c. higher unemployment
d. inflation

Answer 23

inflation

Question 24

The variable that is likely to be exogenous in a model that explains production in a small firm within a large industry is the:

a. amount of output produced by the firm.
b. price of the firm’s inputs.
c. number of workers hired by the firm.
d. amount of machinery employed by the firm.

Answer 24

b. the price of the firm’s inputs.

Question 25

All of the following are reasons why wages and/or prices may be sticky in the short-run EXCEPT:

a. long-term labor contracts often set wages in advance for up to three years.
b. many firms leave their product prices unchanged for long periods of time in order to prevent current customers from “shopping around.”
c. it is costly for firms to print new price lists and advertise frequently changing prices.
d. firms are already charging the highest prices people will pay, so there is no reason to change them.

Answer 25

d. firms are already charging the highest prices people will pay, so there is no reason to change them.

Question 26

The market in which the assumption of continuous market-clearing seems to be LEAST applicable is the:

a. stock market.
b. market for wheat.
c. labor market.
d. market for U.S. Treasury bonds.

Answer 26

c. labor market

Question 27

Formula for percentage change in Q.

  100 x (Q1 - Q0)/Q0

Ex. Q1 = 120, Q0= 100

Answer 27

Answer to Example:
   100 x (120 - 100)/100
    100 x (20/100)
     100 x .20 =  20%