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As applied to the price level, the “rule of 70” indicates that the number of years required for the price level to double can be found by:
dividing the annual rate of inflation into “70.”
A competitive market system:
encourages growth by allowing producers to make profitable investment decisions based on market signals.
Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices?
Firms respond to shorter term demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels.
Demand-pull inflation:
occurs when total spending exceeds the economy’s ability to provide output at the existing price level.
Demand shocks:
refer to unexpected changes in the desires of households and businesses to buy goods and services.
Other things equal, which of the following would decrease the rate of economic growth, as measured by changes in real GDP?
A decrease in the labor force participation rate
(Consider This) The Consider This box on patents and innovation demonstrates that:
Patent protection for U.S. companies may not be as effective when other countries do not respect or enforce U.S. patent laws.
Innovations such as the microchip and the Internet lead to business cycle variations because:
significant innovations occur irregularly and unexpectedly.
The annual growth of U.S. labor productivity:
was greater between 1995 and 2009 than between 1973 and 1995.
(Consider This) The main point of the Consider This box on clipping coins is that:
inflation imposes a “hidden tax” on those who hold money.
An outward shift of a nation’s production possibilities curve:
neither ensures a nation of an increase in real GDP nor of an increase in real GDP per capita.
The intense competition of free trade prevents the investment that generates economic growth.
Transfer payments are:
excluded when calculating GDP because they do not reflect current production.
If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is:
$320 billion.
(positive = less)
In the short run, firms are more likely to respond to demand shocks by altering inventory levels than by changing how much they produce.
When economists refer to “investment,” they are describing a situation where:
resources are devoted to increasing future output.
At the economy’s natural rate of unemployment:
the economy achieves its potential output.
Between 1950 and 2009, U.S. real GDP grew at an average annual rate of about:
3.2 percent.
Okun’s law:
shows the relationship between the unemployment rate and the size of the negative GDP gap.
The phase of the business cycle in which real GDP is at a minimum is called:
the trough.
The natural rate of unemployment is:
that rate of unemployment occurring when the economy is at its potential output.
Which figure(s) represent a situation where prices are sticky?
Sticky = Horizontal Line @ P
** Not Angled Line
(STICKY (Horiz line) GRAPH)
Assuming this market is representative of the economy as a whole, this economy:
(STICKY (Horiz line) GRAPH)
faces fluctuating output levels whenever there is a demand shock.
(STICKY (Horiz line) GRAPH)
Assuming this market is representative of the economy as a whole, a negative demand shock will most likely:
(STICKY (Horiz line) GRAPH)
increase unemployment.
(Vertical Line GRAPH)
Assuming this market is representative of the economy as a whole, this economy:
(Vertical Line GRAPH)
is capable of always producing at its optimal capacity.
Economy A: gross investment equals depreciation
Economy B: depreciation exceeds gross investment
Economy C: gross investment exceeds depreciation
Positive net investment is occurring in:
economy C only.

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