CHAPTER 1 – A TOUR OF THE WORLD
 
MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 

1) 

In 2003, output per capita in the United States was approximately equal to:  

1) 

_______ 
A) 

$17,500.  

B) 

$67,500.  

C) 

$57,500. 

D) 

$37,500.  

2) 

By 2000, many people argued that the United States had entered a New Economy. Which of the following was considered a characteristic of the New Economy when compared to previous economic conditions?  

2) 

_______ 
A) 

sustained higher growth  

B) 

lower inflation  
C) 

lower unemployment  

D) 

all of the above  

3) 

The standard of living typically refers to:  

3) 

_______ 
A) 

wealth per capita.  

B) 

the rate of unemployment.  
C) 

output per capita. 

D) 

all of the above  

4) 

In which of the following periods was the U.S. budget in surplus?  

4) 

_______ 
A) 

early 1980s  

B) 

late 1980s  

C) 

early 1990s  

D) 

late 1990s  

5) 

A comparison of the U.S. output growth rates for the periods 1960-1994 and 1994-2000 indicates that:  

5) 

_______ 
A) 

the growth rates are basically the same.  
B) 

the growth rates have decreased.  
C) 

the growth rate has increased in the more recent period.  
D) 

the recent reduction in growth rates is due to large reductions in capital formation.  

6) 

Economists have suggested that the relatively higher unemployment in Europe has been caused by which of the following?  

6) 

_______ 
A) 

inadequate macroeconomic policies  
B) 

increased labor costs  
C) 

relatively high unemployment benefits  
D) 

relatively high level of worker protection  
E) 

all of the above  

7) 

Which of the following countries had the lowest level of output per capita in 2003?  

7) 

_______ 
A) 

France  

B) 

United Kingdom  
C) 

German  

D) 

Spain  

8) 

At what point could the Euro be used as currency?  

8) 

_______ 
A) 

January 1, 1998  

B) 

January 1, 1999  

C) 

January 1, 2000  

D) 

January 1, 2002  

9) 

In 2003, output per capita in the Japan was approximately equal to:  

9) 

_______ 
A) 

$66,700.  

B) 

$56,700.  

C) 

$36,700.  

D) 

$16,700.  

10) 

Deflation represents:  

10) 

______ 
A) 

a reduction in the aggregate price level.  

B) 

a reduction in output.  
C) 

a recession.  

D) 

an increase in the unemployment rate.  

11) 

Which of the following policies were used in Japan to end the Japanese slump?  

11) 

______ 
A) 

lower taxes  

B) 

low interest rates  
C) 

higher government spending  

D) 

all of the above  

12) 

Which of the following is believed by some to have hindered the Japanese recovery?  

12) 

______ 
A) 

relatively high inflation  

B) 

low interest rates  
C) 

excessive government spending  

D) 

the state of the Japanese banking system  

ESSAY.  Write your answer in the space provided or on a separate sheet of paper. 

13) 

Explain why some economists are concerned by recent increases in U.S. budget deficits.  

14) 

By 2005, what were the two sets of issues that most concerned macroeconomists about the U.S. economy?  

15) 

What are the three aspects about the U.S. economy that have caused some to believe that the United States has entered a New Economy?  

16) 

Discuss the types of policies that could be implemented to reduce European unemployment.  

17) 

Discuss what is meant by labor market rigidities and explain how they might cause the relatively high unemployment in Europe.  

18) 

Discuss some of the potential benefits and costs of the adoption of the Euro.  

19) 

Briefly explain the possible link between movements in Japanese stock prices and the Japanese slump of the 1990s.  

20) 

Discuss the types of policies implemented in Japan to end the Japanese slump.  

21) 

Briefly explain two of the reasons why stock prices can change.  

ANSWERS
1) 

D 

2) 

D 

3) 

C 

4) 

D 

5) 

C 

6) 

E 

7) 

D 

8) 

D 

9) 

C 

10) 

A 

11) 

D 

12) 

D 

13) 

An increase in the budget deficit is believed by most economists to have, all else fixed, a negative effect on future output. When the budget deficit increases with a given amount of private saving (i.e., saving by households), there will be fewer funds available for firms to invest. With less investment, there will be less capital formation. The negative effect of the budget deficit on capital formation will cause future output to be lower than it otherwise would be.  

14) 

The first issue dealt with the consequences of the growing U.S. budget deficits. For many macroeconomists, these larger budget deficits were believed to have a negative effect on economic growth. The second issue focused on whether the United States had entered a New Economy where the rate of growth of output had risen to a permanently higher level, unemployment was permanently lower, and inflation was permanently lower.  

15) 

The three aspects of the New Economy were: permanently higher growth rate of output, lower unemployment, and lower inflation.  

16) 

There are basically two sets of policies. First, policy makers could reduce labor market rigidities that some economists believe have contributed to the high unemployment. Some examples of labor market rigidities are high unemployment benefits, high minimum wages, and excessive job protection regulations. The second set of policies includes bad labor relations and inadequate macroeconomic policies.  

17) 

Examples of labor market rigidities are: relatively high minimum wage, relatively high unemployment benefits, and relatively high level of worker protection. All three of these are hypothesized to cause a reduction in employment and, therefore, an increase in the unemployment rate.  

18) 

One of the benefits of the Euro is largely symbolic. Countries that have in the past century been in wars against each other are now using the same currency. There are economic benefits as well. The use of the same currency will eliminate the need to convert currencies when, for example, buying foreign goods from a country that has also adopted the Euro. One of the possible costs of the Euro is that it will force countries to pursue the same monetary policy. No longer will policy makers in these countries pursue independent monetary policy.  

19) 

The decrease in stock prices will cause a reduction in wealth, a reduction in consumption, and a reduction in economic activity.  

20) 

Japanese policy makers implemented (eventually) both expansionary monetary and fiscal policy. In terms of fiscal policy, we observed both increases in government spending and reductions in taxes. In terms of monetary policy, we observed reductions in interest rates.  

21) 

Stock prices can change due to changes in fundamentals or the result of the existence of a speculative bubble or fad.