Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 351:

  Which of the following actions is the acknowledged preventive measure for a period of deflation?

  A. Increasing interest rates.

  B. Increasing the money supply.

  C. Decreasing interest rates.

  D. Decreasing the money supply.

  Correct Answer: B

  Choice "b" is correct. Deflation is a general decline in the overall price level (i.e., when the inflation rate is negative). Increasing the money supply causes the overall price level to rise. As a result, it helps eliminate deflation. Choice "a" is incorrect. Increasing interest rates causes aggregate demand to shift left. As a result, the aggregate price level will fall even further. This will exasperate deflation. Choice "c" is not wrong but it is not as good an answer as "b". A decrease in interest rates causes the aggregate demand curve to shift right. As a result, the aggregate price level will rise. This helps eliminate deflation. However, there are times when interest rates are already so low that lowering interest rates is not an option. Thus, the preferred or "acknowledged" preventative measure for deflation is increasing the money supply. Choice "d" is incorrect. Decreasing the money supply causes the overall price level to fall. This would obviously exasperate deflation.

• Question 352:

  To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?

  A. Lower the discount rate it charges to banks for loans.

  B. Sell U.S. government bonds in open-market transactions.

  C. Increase the federal funds rate charged by banks when they borrow from one another.

  D. Increase the level of funds a bank is legally required to hold in reserve.

  Correct Answer: A

  Choice "a" is correct. During a recession, real GDP has fallen and unemployment has risen. To stimulate the economy, the Fed can lower the discount rate. This causes the money supply to increase, which, in turn, causes aggregate demand to shift right. As a result, real GDP would increase and unemployment would decrease. Choice "b" is incorrect. If the Fed sells U.S. government bonds in the open market, the money supply will decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase. Choice "c" is incorrect. Increasing the federal funds rate would increase interest rates. Higher interest rates cause the aggregate demand curve to shift left. As a result, real GDP would decrease and unemployment would increase. Choice "d" is incorrect. An increase in the required reserve ratio causes the money supply to decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.

• Question 353:

  Inflation can be caused by:

  A. Increases in aggregate demand only.

  B. Increases in aggregate supply only.

  C. Decreases in aggregate demand and increases in aggregate supply.

  D. Increases in aggregate demand and decreases in aggregate supply.

  Correct Answer: D

  Choice "d" is correct. Both an increase in aggregate demand and a decrease in aggregate supply can cause inflation. Choice "a" is incorrect. While an increase in aggregate demand can cause inflation, it is not the only cause of inflation. Choice "b" is incorrect. An increase in aggregate supply would lower the overall price level, not increase the overall price level. Choice "c" is incorrect. A decrease in aggregate demand would lower the overall price level, not increase the overall price level.

• Question 354:

  When the overall price level is rising, nominal interest rates tend to be:

  A. Unaffected by changes in the price level.

  B. Falling.

  C. Rising.

  D. None of the above.

  Correct Answer: C

  Choice "c" is correct. The relationship between nominal interest rates and inflation can be seen by rearranging the equation for real interest rates as follows: Nominal Interest Rate = Real Interest Rate + Inflation Thus, if real interest rates do not change, a 1% increase in the inflation rate will lead to a 1% increase in nominal interest rates.

• Question 355:

  Stagflation refers to:

  A. A combination of rising unemployment and rising real GDP.

  B. A combination of rising unemployment and a rising price level.

  C. High inflation rates.

  D. High unemployment rates.

  Correct Answer: B

  Choice "b" is correct. Stagflation occurs when the economy suffers a recession that is characterized by

  falling output, rising unemployment, and a rising price level.

  Choice "a" is incorrect. Real GDP is falling during stagflation, not rising.

  Choice "c" is incorrect. High inflation rates is just one aspect of stagflation; the other is falling output and

  rising unemployment. Choice "d" is incorrect. High unemployment rates are just one aspect of stagflation;

  the other is a rising overall price level (high inflation).

• Question 356:

  The inflation rate measures:

  A. The rate at which nominal GDP increases.

  B. How the price of a particular good changes over time.

  C. How nominal interest rate changes over time.

  D. The rate at which the overall price level increases.

  Correct Answer: D

  Choice "d" is correct. The inflation rate measures the rate of increase in the overall price level in the

  economy.

  Choice "a" is incorrect. The inflation rate is associated with price level changes not changes in the nominal

  value of output.

  Choice "b" is incorrect. Inflation refers to a sustained increase in the overall price level. Not the price of a

  particular good.

  Choice "c" is incorrect. The inflation rate is associated with price level changes not interest rate changes.

• Question 357:

  The CPI jumps from 131 in year 1 to 136.5 in year 2. What is annual inflation rate?

  A. 4.2%

  B. 3%

  C. 1.38%

  D. 13.8%

  Correct Answer: A

  Choice "a" is correct. The inflation rate is measured as:

  

• Question 358:

  When a worker quits work to stay at home with the children, it is an example of:

  A. Frictional unemployment.

  B. Structural unemployment.

  C. Cyclical unemployment.

  D. Not counted in unemployment figures.

  Correct Answer: D

  Choice "d" is correct. Unemployment only tallies workers actively seeking employment; it does not count

  retirees or stay-at-home parents.

  Choice "a" is incorrect. Frictional unemployment describes workers who leave work voluntarily to seek a

  better position.

  Choice "b" is incorrect. Structural unemployment describes workers whose skills are no longer needed.

  Choice "c" is incorrect. Cyclical unemployment describes workers unemployed due to the business cycle.

• Question 359:

  If consumption is $70b, investment $50b, government spending $20b, exports $7b, and imports $5b, what is GDP?

  A. $152b.

  B. $138b.

  C. $140b.

  D. $142b.

  Correct Answer: D

  Choice "d" is correct. By the expenditure approach to measuring GDP, GDP equals: Consumption + Investment + Government Spending + Exports - Imports. Thus, GDP = 70 + 50 + 20 + 7 - 5 = 142b.

• Question 360:

  Initially the nominal interest rate is 8 percent and the inflation rate is 6 percent. One year later, the nominal interest rate rises to 12 percent while the inflation rate rises to 10 percent. It follows that the real rate of interest:

  A. Has remained the same.

  B. Has fallen.

  C. Has risen.

  D. Insufficient information given for an answer.

  Correct Answer: A

  Choice "a" is correct. The real interest rate equals the nominal interest rate minus the inflation rate. Thus, the real interest rate in the first year is: real interest rate = 8 - 6 = 2 and the real interest rate in the next year is: real interest rate = 12 - 10 = 2.