Q: Suppose the cost of a CPI basket in the base year is $$50 and in the current year is 70. $$What is the CPI for the current year?

$$CPI = \frac{70}{50} \times 100 = 140$$

Q: Suppose the government increases its spending by $100 billion and the marginal propensity to consume (MPC) is 0.75. What is the total change in equilibrium GDP, assuming no taxes or imports?

$$\Delta Y = \frac{1}{1-0.75} \times 100 = 4 \times 100 = 400$$ billion

Question 1

Which of the following best describes the natural rate of unemployment?

Accepted Answer

The unemployment rate when cyclical unemployment is zero, consisting only of frictional and structural unemployment.

Question 2

Suppose the cost of a CPI basket in the base year is $$50 and in the current year is 70. $$What is the CPI for the current year?

Accepted Answer

$$CPI = \frac{70}{50} 	imes 100 = 140$$

Question 3

Which of the following is NOT a component of the labor force?

Accepted Answer

People under 16 years of age

Question 4

If the marginal propensity to consume (MPC) is 0.8, what is the value of the simple expenditure multiplier?

Accepted Answer

$$Multiplier = \frac{1}{1-0.8} = 5$$

Question 5

Which of the following best explains why deflation is considered harmful to an economy?

Accepted Answer

Consumers delay purchases, reducing incomes and spending, which can lead to a downward economic spiral.

Question 6

According to the Cobb-Douglas production function $$Y = A K$$^{\alpha}$$ N$$^{1-\alpha}$$, what does the parameter A$ represent?

Accepted Answer

Total factor productivity (TFP)

Question 7

If the unemployment rate is calculated as $$\frac{Unemployed}{Labor\ Force}$$, which of the following would cause the unemployment rate to rise even if the number of employed people increases?

Accepted Answer

Discouraged workers re-enter the labor force and start looking for jobs.

Question 8

Which of the following is a likely effect of a negative supply shock, such as a sudden increase in oil prices, in the AS-AD model?

Accepted Answer

Short-run aggregate supply shifts left, causing stagflation (higher prices and lower output).

Question 9

If the marginal propensity to import (MPI) increases, what happens to the expenditure multiplier?

Accepted Answer

The multiplier decreases because more spending leaks out as imports.

Question 10

Which of the following is a key reason why total factor productivity (TFP) is considered crucial for long-run economic growth?

Accepted Answer

TFP captures the effects of technological progress, innovation, and institutional quality, which can sustain growth even when capital accumulation faces diminishing returns.

Question 11

Suppose the government increases its spending by $100 billion and the marginal propensity to consume (MPC) is 0.75. What is the total change in equilibrium GDP, assuming no taxes or imports?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.75} 	imes 100 = 4 	imes 100 = 400$$ billion

Question 12

Which of the following best describes the difference between long-run aggregate supply (LAS) and short-run aggregate supply (SAS)?

Accepted Answer

LAS is vertical at potential GDP, while SAS is upward sloping due to sticky nominal wages.

Question 13

If the price level rises but the money wage rate remains unchanged, what happens in the short run according to the AS-AD model?

Accepted Answer

Firms increase production, moving up along the SAS curve.

Question 14

Which of the following policies would shift the aggregate demand (AD) curve to the right?

Accepted Answer

A decrease in interest rates by the central bank.

Question 15

According to the Rule of 70, how many years will it take for an economy growing at 2% per year to double its real GDP per capita?

Accepted Answer

$$Years = \frac{70}{2} = 35$$

Question 16

Which of the following is an example of frictional unemployment?

Accepted Answer

A recent college graduate searching for their first job.

Question 17

If the labor force participation rate is calculated as $$\frac{Labor\ Force}{Working\ Age\ Population}$$, which of the following would increase the rate?

Accepted Answer

An increase in the number of people actively seeking work.

Question 18

Which of the following is a likely long-run effect of an increase in potential GDP?

Accepted Answer

The LAS curve shifts right, increasing the economy's productive capacity.

Question 19

Which of the following best describes the Keynesian view of fiscal policy during a recession?

Accepted Answer

Fiscal stimulus should be used to boost aggregate demand and reduce unemployment.

Macroeconomics Study Guide: Unemployment, Inflation, Economic Growth, and the AS-AD Model

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