1. Economic activity moves from a period of expansion to a _______ and then moves into a period of _______ until it reaches a _____.
A. peak; expansion; trough
B. peak, recession; trough
C. trough; expansion; peak
D. trough; recession; peak
2. Industrial production, total sales, nonfarm employment, and after-tax household income are examples of _____ indicators of economic activity.
3. When recessions are the result of slowing growth in potential output, the government's best response is a policy to:
A. increase aggregate demand.
B. decrease aggregate demand.
C. promote saving and investment.
D. reduce government spending.
4. Changes in the growth rate of potential output and deviations of actual output from potential output are two logical explanations for:
A. the decline in the natural rate of unemployment.
B. short-term economic fluctuations.
C. increasing wage inequality.
D. skill-biased technological change.
5. If the output gap equals -$200 million, then
A. cyclical unemployment equals the sum of structural and frictional unemployment.
B. there is a recessionary gap.
C. there is no cyclical unemployment.
D. potential GDP is less than actual GDP.
6. If the cyclical rate of employment equals 1% and the actual rate of unemployment equals 8%, then the natural rate of unemployment must equal:
7. Compared to older workers, younger workers change jobs more frequently, so they are more prone to _____ unemployment and have fewer skills, so they are more prone to ____ unemployment.
A. cyclical; frictional
B. frictional; structural
C. structural; frictional
D. frictional; cyclical
8. According to Okun's Law, each extra percentage point of ___ unemployment is associated with a ____ percentage point increase in the output gap, measured in relation to potential output.
A. frictional; 2
B. frictional; 4
C. cyclical; 2
D. cyclical; 4
9. According to Okun's Law, when cyclical unemployment increases from 1 to 2 percent, the output gap increases from ___ percent.
A. -2 to -4
B. -1 to -2
C. 3 to 4
D. 1 to 2
10. If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential?
11. In Macroland, a country that operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real GDP in Macroland?
A. $9.6 trillion
B. $9.8 trillion
C. $10 trillion
D. $10.2 trillion
12. If the actual rate of unemployment equals the natural rate of unemployment, then:
A. potential output is greater than real GDP.
B. potential output equals real GDP.
C. potential output is less than real GDP.
D. there is a recessionary gap.
13. In the long run, output gaps are eliminated by:
A. reducing potential output.
B. increasing potential output.
C. price changes.
D. increased efficiency in labor markets.
14. If firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in:
A. potential output.
C. capital and technology.
D. economywide spending.
15. Two possible explanations for the decline in the natural rate of unemployment in the United States over the past twenty years are:
A. the changing age structure of the population and more efficient labor markets.
B. advances in computer technology and globalization.
C. increasing wage inequality and skill-biased technological change.
D. greater quantities of human capital and increased average labor productivity.